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Small Cap Growth Fund —
Harbor Small Cap Growth returns over 40% in 2013
4th Quarter, 2013
"We think we can still find companies that are well positioned, growing 15% to 20%, and trading at reasonable multiples. "
– Will Muggia

Small cap growth stocks registered a solid gain in the fourth quarter of 2013 and finished the year with a return of more than 40%. The Russell 2000® Growth Index, a measure of U.S. equities in the small cap growth segment, posted returns of 8.17% for the three months ended December 31, 2013, and 43.30% for the calendar year.
The Harbor Small Cap Growth Fund outperformed the index with returns of 11.19% for the fourth quarter and 44.78% for the year. Fund returns also surpassed those of the Russell 2000® Growth benchmark for the 5-year and 10-year periods ended December 31, 2013, and since the Fund's inception in 2000.
Stock selection, primarily in the Health Care sector, was the primary driver of Fund performance in both the fourth quarter and in calendar 2013, Portfolio Manager Will Muggia reports. Leading individual contributors in the latest quarter included Health Care names Cyberonics, Dynavax Technologies, Gentium, Huron Consulting, Team Health Holdings, and ViroPharma. Energy names, led by Tesoro and Western Refining, also boosted returns in the fourth quarter.
Will Muggia's comments were made in a January 14, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2013, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2013.

Interview Highlights

Focus on earnings growth
Last year's market was driven by P/E multiple expansion; this year I think it's going to be much more dependent on earnings growth. I wouldn't rule out another point of multiple expansion, but I think it's going to be an earnings-driven market and you'll want to own businesses that are improving. I feel that if you own a portfolio of subpar earnings growers you're going to underperform the market in 2014.
Auto sales
Pent-up demand and easy access to financing has driven a multi-year recovery in auto sales. We remain very constructive on the auto-related business, although it is not lost on us that the recovery has been quite strong since 2009 and we'll have to continue to be selective there.
Picking Energy stocks
We were overweight all year in the Energy sector. It was not a good place to be overweight, because the sector did poorly, but we had good stock selection and were able to add value. Investment choices in Energy, primarily in refining and oil service names, contributed about a percentage point to relative performance in the fourth quarter.
Boost from Health Care names
Our top performing area, in both the fourth quarter and the full year, was Health Care. We have a big overweight in the sector but it was really driven by stock selection. Most of the performance was generated in biotech names and specialty pharmaceuticals.
Balancing value and growth
We're seeking a balance between value and growth. We're not going to buy companies with extreme valuations and we're not buying deep-value names. We're hunting in the middle ground. We think we can still find companies that are well positioned, growing 15% to 20%, and trading at reasonable multiples.
Robust demand
We continue to be constructive on the U.S. housing industry but it's not the layup that it was two years ago. We are looking for ancillary plays outside of home building. Furniture, lighting, floor coverings, and kitchen and bath remodeling are some of the areas continuing to experience robust demand trends, and that is where we are positioned.

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.