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Small Cap Value Fund —
Small caps closed 2011 with solid rally
4th Quarter, 2011
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"We're focused on buying good companies and avoiding areas where we see peril. "
– Paul Viera

Small cap stock prices staged a strong recovery in the fourth quarter of 2011. Key factors in the rebound included signs of progress in addressing Europe's debt crisis as well as improving U.S. economic data, says Paul Viera, Portfolio Manager of the Harbor Small Cap Value Fund.
The U.S. small cap value universe, as measured by the Russell 2000® Value Index, registered a return of 15.97% for the quarter. All 10 economic sectors in the index had positive returns. The Harbor Small Cap Value Fund outpaced the index with a return of 17.63%. Stock selection in the Energy, Financials, and Health Care sectors made major contributions to the Fund's performance relative to the index, Viera reports.
For the full year, the Fund returned a positive 2.38% versus a negative return of -5.50% by the Russell 2000® Value benchmark. From a longer-term perspective the Fund also outperformed the index for the 5-year and 10-year periods ended December 31, 2011.
Paul Viera's comments were made in a January 12, 2012, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2011, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2011.

Interview Highlights

Stock selection focus
We're focused on buying good companies and avoiding areas where we see peril. We continue to see problems in the Financials sector. Nonetheless, the Financial stocks that we selected performed better than those in the benchmark.
Portfolio metrics
The overall portfolio continues to have a lower P/E than the benchmark, lower debt-to- capitalization, a higher earnings-growth rate, and a higher return on equity. Those are elements that you've seen consistently with us over the years. We don't target them specifically, but as our process unfolds they tend to be pretty consistent characteristics of the portfolio.
Potential takeover targets
We never buy a stock on the expectation that it will be taken out by acquisition. Our focus is on companies that have stable businesses, that do relatively better than their peers in all economic environments, and are profitable and producing meaningful cash flows. It turns out that those characteristics are also attractive to private equity buyers as well as corporate buyers. In 2011, which was volatile by any definition, four of our companies were taken out by acquisition.
Caution on Financials
The biggest underweight in the portfolio is the Financials sector. We are still of the belief that the Financial stocks, and in particular the small cap stocks in that sector, are expensive relative to other things we could own.

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.