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Small Cap Growth Fund —
Domestic stocks ended 2016 on a strong note
4th Quarter, 2016
"In general, we try to take a balanced approach to the portfolio's macroeconomic exposures. "
– Westfield Capital Management Company, L.P.

Domestic stocks ended 2016 on a strong note, with the stock market led by Financials and Industrials stocks following the U.S. presidential election. During the quarter, small cap stocks significantly outperformed large and mid cap stocks, and value stocks outperformed growth stocks across the capitalization spectrum. In the U.S. small cap growth equity market, as measured by the Russell 2000® Growth Index, the Financials sector performed particularly well. The Telecommunication Services sector, a small weighting in the index, also performed well, as did the Industrials sector. Conversely, the Health Care sector declined, while the Information Technology and Real Estate sectors had positive results but lagged the index.
For the fourth quarter of 2016, the Russell 2000® Growth Index, a measure of growth-oriented companies in the small cap segment of the U.S. equity market, returned 3.57%. The Harbor Small Cap Growth Fund underperformed its benchmark, with a return of 2.64%. Stock selection in the Information Technology sector detracted from relative performance for the quarter. In contrast, stock selection in the Consumer Discretionary sector contributed to relative results.
Westfield Capital Management Company’s comments were made in a January, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended December 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through December 31, 2016.

Interview Highlights


Most of the Quarterly Gains Came After the U.S. Presidential Election in November
During the quarter, oil prices rose, consumer confidence hit a new five-year high, and unemployment claims continued to drop. Domestic equities posted declines in October amid increased market gyrations, but their performance was largely driven by stock-specific factors. The market dynamic changed abruptly after the U.S. presidential election, with equities surging to new highs. As is often the case during periods of swift market rotations, lower price-to-earnings, smaller capitalization, value-style companies led the charge. In a step toward normalization of financial conditions after a prolonged period of zero-rate interest rates, the U.S. Federal Reserve raised short-term rates by 25 basis points and signaled a quicker pace of rate increases over the next two years. Most of the quarterly gains came after the U.S. presidential election in November, with the broad market fueled by investor expectations that the business-friendly mindset of the incoming administration could accelerate gross domestic product growth.
Economic Growth Indicators that We Track Showed Signs of Improvement
In general, we try to take a balanced approach to the portfolio’s macroeconomic exposures, preferring to invest in idiosyncratic ideas that we believe can perform well regardless of the macroeconomic and interest-rate environment. However, the growth indicators that we track showed signs of improvement in the fourth quarter. We are encouraged by the recent strength and more optimism about growth prospects in the domestic economy than we were mid-year. We see the Industrials, Materials and Energy sectors as potential beneficiaries of improving economic growth, and we view rising interest rates as a powerful tailwind for the Financials sector.
We Have Been Constructive on Domestic Equities
The market’s post-election surge has been attributed by many observers to expectations for tax reform, fiscal stimulus and reduced regulation out of Washington, D.C., under the new administration. We believe these measures, if implemented successfully, could help accelerate economic growth. Various confidence measures have improved materially, which has helped drive the equity market rally. In addition, several leading global economic indicators have not only stabilized, but also have turned positive. During the quarter, the U.S. unemployment rate reached its lowest level since 2007, domestic purchasing managers’ indexes were rising, and consumer confidence hit a multi-year high. Stock correlations have decreased, indicating a stock market that may finally be starting to allocate capital based on sector- and stock-specific criteria, instead of just being driven by low interest rates and macroeconomic factors. We continue to believe that our bottom-up approach to stock picking and our commitment to valuation discipline will be rewarded going forward.

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 www.harborfunds.com.

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.