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Small Cap Growth Fund —
The U.S. equity market continued to advance in the second quarter
2nd Quarter, 2017
"Looking ahead, global economic indicators remain stable, which we believe supports the notion that a further advance in risk-on assets could be possible. "
– Westfield Capital Management Company, L.P.

The U.S. equity market continued to advance in the second quarter of 2017, capping the strongest first half of the year since 2013. Its strength came despite rising geopolitical uncertainty and a lack of momentum in domestic policy and regulatory initiatives. During the quarter, small cap stocks underperformed large and mid cap stocks, and growth stocks outperformed value stocks across the capitalization spectrum. In the U.S. small cap growth equity market, as measured by the Fund’s benchmark, the Russell 2000® Growth Index, the Telecommunication Services sector, a relatively small weighting in the index, performed particularly well. The Health Care and Real Estate sectors also performed well. Conversely, Energy and Consumer Staples, small weightings in the index, declined, as did Financials.
The Harbor Small Cap Growth Fund returned 3.63% during the second quarter of 2017, underperforming its benchmark, which returned 4.39%. Stock selection in Health Care detracted from relative performance. In contrast, security selection in Materials contributed to relative results.
Westfield Capital Management Company’s comments were made in a July, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2017.

Interview Highlights

A Performance Dichotomy
U.S. equity markets were led higher during the first two months of the quarter by shares of high quality, growth-oriented Information Technology firms whose strong performance was supported by strong earnings results. Alternatively, economically sensitive sectors struggled to keep pace, and Materials and Industrials lagged while Energy sank deeper into negative territory. This performance dichotomy manifests itself quite well when assessing performance through the lens of style, with growth-oriented stocks far outpacing their value peers. The end of June witnessed a sector leadership shift, with a sell-off in leading Information Technology groups and a sharp advance for the cyclically oriented Financials, Industrials, and Materials. The rotation, which was partially triggered by comments from several monetary policy makers about their commitment to further rate tightening, reignited debates about which groups will lead the markets as we enter the back half of the year.
Market Conditions Were Favorable for Our Investment Approach
During the quarter, market conditions were favorable for our growth at a reasonable price (GARP) investment approach, which seeks companies with faster rates of growth and below-average multiples. The U.S. economy remained resilient, stock and factor correlations continued to decline, and idiosyncratic drivers, such as earnings, helped to determine asset valuations.
We Stay Attuned to Changing Winds and Emerging Currents
The U.S. economy continued to expand in the second quarter of 2017, albeit slowly, and there are signs that growth in both Europe and the emerging markets is accelerating slightly. We pay close attention to economic indicators; however, our investment decisions are based primarily on stock-specific factors. Therefore, we make it our priority to maintain ongoing communications with company management teams in search of increased clarity on their earnings outlooks. We also stay attuned to changing winds and emerging currents in Washington, D.C., constantly assessing the potential impact of new regulations on our investments. We believe the portfolio is well-positioned for the current political and macroeconomic backdrop.
Global Economic Indicators Remain Stable
Looking ahead, global economic indicators remain stable, which we believe supports the notion that a further advance in risk-on assets could be possible. However, based on our research, growth-style equities have been favorites with investors so far this year, and they now trade at a premium to their value-style peers. Our analysis of earnings growth prospects, relative valuations, and fund ownership trends points to a possible slowdown in momentum for this year’s winners. We believe our GARP investment philosophy is set up well to perform in an environment where stocks from companies growing their earnings, but trading at reasonable valuations, are rewarded.

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.