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Small Cap Value Fund —
Monetary easing, reduced fiscal worries helped boost equities in Q1
1st Quarter, 2013
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"Many stocks really hit their stride in the quarter with over 10% of our portfolio names posting returns of better than 25%. "
– Paul Viera

The stock market opened the new year with an impressive advance as U.S. equities posted double-digit gains for the first quarter of 2013. In the view of Paul Viera, Portfolio Manager of the Harbor Small Cap Value Fund, stocks benefited from continued easing by the Federal Reserve as well as diminishing concerns over the potential impact of government tax and spending issues on the U.S. economy.
The Harbor Small Cap Value Fund returned 12.00% in the first quarter, outpacing the 11.63% return of its benchmark, the Russell 2000® Value Index. Stock selection across a range of economic sectors was the primary factor in the Fund's outperformance, Viera says. Portfolio positions in Financials, Information Technology, Telecommunications, Energy, Utilities, and Health Care all outpaced their counterparts in the benchmark index, he reports.
Although Energy shares recorded double-digit gains in the quarter, stocks of a number of companies in the sector are still attractively valued, Viera believes. The investment team also has continued to see opportunities in Technology shares.
Paul Viera's comments were made in an April 10, 2013, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2013, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2013.

Interview Highlights

Favorable stock selection
Most of the sectors in the portfolio beat their benchmark equivalents. That highlights both the breadth and the strength of the stock selection. It wasn't one just sector or one or two names that drove everything; it was good selection across the board.
Boost from Energy names
Energy is one of the most significant overweights in the portfolio with the Fund being about 12% and the index about 6%. And it was one of the biggest contributors to performance in the quarter.
Robust returns
Many stocks really hit their stride in the quarter with over 10% of our portfolio names posting returns of better than 25%. That would include companies like Medical Properties which was up about 36%; Eaton Vance, up 31%; Covance, up 29%, Core Laboratories, up 26%; and Meritage Homes, up 26%. So a broad swath of names did very well.
Monitoring Fed moves
The Federal Reserve has had a big hand in accelerating the performance of the equity markets and it is going to have to find a way at some point to remove itself from the party without being disruptive. We'll have to watch very carefully how the Fed navigates that. It's going to have to do it skillfully in order for this to turn out well.
Portfolio metrics
At the end of the quarter, the portfolio in aggregate had a lower P/E ratio than the benchmark, lower debt-to-capitalization, a higher earnings growth rate, and a higher return on equity. These favorable comparisons have become a fairly consistent outgrowth of our stock selection process.

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.