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Small Cap Growth Fund —
Equities end higher after a bumpy quarter
2nd Quarter, 2016
"We continue to believe the U.S. is the best and safest place to be and expect to see modest, but steady, growth in the domestic economy in the second half of the year. "
– Westfield Capital Management Company, L.P.

Major domestic equity indexes closed higher in the second quarter of 2016, but it was a bumpy road to get there. Overall, small cap stocks outperformed large and mid cap stocks, and value stocks outperformed growth stocks. In the U.S. small cap growth equity market, the Utilities and Telecommunication Services sectors led advancers during the quarter. Consumer Discretionary was the only sector to decline.
For the second quarter, the Russell 2000® Growth Index, a measure of growth-oriented companies in the small cap segment of the U.S. market, returned 3.24%. The Harbor Small Cap Growth Fund slightly underperformed its benchmark, with a return of 2.95%. Stock selection in the Health Care sector detracted from relative performance for the quarter, as did selection in the Energy sector. The Fund’s lack of exposure to Consumer Staples, Telecommunication Services and Utilities, which were among the best performing areas of the market, also held back relative results. Conversely, stock selection in the Consumer Discretionary and Financials sectors contributed to relative results.
Among individual holdings, one of the Fund’s largest detractors from relative performance was Merrimack Pharmaceuticals, a small biotechnology company that develops innovative products for the treatment of cancer and autoimmune diseases. The company posted quarterly earnings and revenues that came in stronger than expectations; however, a slight sales miss for its pancreatic cancer drug sent its shares lower. A contributor to relative results during the quarter was Installed Building Products, a residential insulation provider. The company reported strong earnings results, including significant volume and price growth.
Westfield Capital Management Company’s comments were made in a July, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2016.

Interview Highlights

Defensive Market Segments Generally Performed Well
A reasonable start to the quarter was interrupted at various points by weaker than expected quarterly earnings results, a subpar jobs report from the U.S. Department of Labor and, most recently, by the United Kingdom’s vote to exit the European Union. In April and May, market returns were driven by company-specific fundamental and valuation factors, rather than by investors’ global macroeconomic worries. The surprising outcome of the U.K.’s referendum at the end of June only exacerbated the dichotomy between the two forces competing for equity market leadership: the most defensive, bond-like Utilities, REITs and Telecommunication Services segments, versus the economically sensitive, earnings-driven Consumer Discretionary, Industrials and Information Technology sectors.
A Detractor and a Contributor for the Quarter
During the quarter, Navigator Holdings, an oil and gas transportation company, detracted from relative results. The company missed consensus earnings expectations, which it attributed to seasonal weakness and warm weather. We continue to own the shares and think the company is well-positioned in its industry. Masimo, a medical devices company, contributed to relative performance for the quarter. The company has surpassed consensus earnings expectations for six consecutive quarters, with recent results driven by accelerated international orders, new product launches and market share gains.
Portfolio Activity
During the quarter, we initiated a position in Community Healthcare Trust, a Health Care REIT that owns and leases properties to hospitals, doctors and health care systems. We think the company operates in a favorable segment of health care-related real estate, focusing on lessees that are fairly insulated from headwinds typically associated with the sector. We sold our shares of Restoration Hardware Holdings, a luxury home furnishings retailer, in May. Earlier in the year, the company had reduced its earnings and revenue guidance amid operational challenges and softness in select geographic markets.
Our U.S. Equity Market Outlook
Recent sentiment surveys showed the lowest levels of bullish sentiment among investors since 2005. We view this data as a contrarian indicator, suggesting that the market still has some room to advance. Indeed, with negative interest rates in several European countries, and the yield on the 10-year U.S. Treasury at 1.37% at the end of June, its lowest level ever, we think investors have few alternatives to stocks. We continue to believe that the U.S. is the best and safest place to be and expect to see modest, but steady, growth in the domestic economy in the second half of the year.

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.