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Small Cap Value Fund —
A reversal of the third quarter
4th Quarter, 2015
"We attempt to find those companies that are going to be able to produce earnings at a more significant rate than the overall market believes and buy them at a cheaper price because the overall market hasn't recognized it. "
– EARNEST Partners LLC

Value-oriented shares of smaller U.S. companies advanced in the fourth quarter of 2015, with the Russell 2000® Value Index posting a return of 2.88%. In largely a reversal of the prior quarter when all sectors delivered negative absolute results, the majority of sectors delivered positive returns in the fourth quarter, with Information Technology, Telecommunication Services, and Health Care the leading sectors. Energy and Consumer Discretionary were the two sectors that delivered negative absolute results.
The Harbor Small Cap Value Fund posted a return of 5.46%, outperforming the index by 2.58%. For the full year period, the Fund was down -3.66%, outperforming the index’s return of -7.47%. Good stock selection and sector allocation were the drivers of relative outperformance during the fourth quarter. From an allocation perspective, a meaningful 14% overweight to the outperforming Information Technology sector and a 9% underweight to the underperforming Consumer Discretionary sector were the main drivers of results.
From a security selection point of view, good stock selection in Information Technology and, to a lesser extent, Industrials and Materials, were the main drivers of positive performance. Within Information Technology, IT services firm Global Payments, which was up 12% for the period, was a meaningful contributor. Within Industrials, a number of active positions were additive to performance, including Snap-on Inc., and within Materials, an overweight to chemicals firm Valspar helped results.
Portfolio Manager Paul Viera’s comments were made in a January 14, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2015, unless otherwise indicated. All references to the year-to-date are for the period January 1, 2015 through December 31, 2015.

Interview Highlights

On Being Bottom-Up Stock Pickers
As it relates to the Harbor portfolio in particular, I think one of the things that I have talked about historically is that we are bottom-up stock selectors. That means we select securities name by name on a fundamental basis. We do not pick stocks based on some grand theme or macroeconomic event like risk-on or risk-off that dominates the marketplace. Our investing is based on individual stock selection. This approach is what carried the day for us in the past and what we believe will work in the future.
View on Financials
If I go to what matters the most in terms of looking at the sector weights of the portfolio, one of the unique characteristics about the small cap value benchmark is its weight to Financials. That weight today stands at 44% – that is, almost half the benchmark is in Financials. It is our position that this is overdone. Earnest’s weighting to Financials is about half of that, which we believe is still a very healthy exposure. When looking at sector weightings, it’s not just a matter of looking at a particular space in isolation. It is important to review alternative investments, and so it has been our view, and it was our view in the fourth quarter, that there were better alternatives to owning financial stocks. We’re not wed to that position because there could be swings in valuation or swings in legislation that help valuation that would cause us to add to our position in Financials. But where we stand right now is that we continue to be underweight the space.
Owning Quality Companies at a Discount
Owning quality companies with good growth prospects at a discount is a profile that we’ve had if you looked at us over the last ten years. It has been our observation, all things being equal, that you do much better by owning companies that are higher quality. Quality can be defined in lots of different ways, but I think the way that we define quality includes the strength of a company’s balance sheet, including looking at leverage, and having relatively sober projections around a firm’s growth prospects. Overall, we would argue that our portfolio is of higher quality than our benchmark index.

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.