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Small Cap Value Fund —
Fund outperforms in v-shaped market
1st Quarter, 2016
"In the fullness of time, you always have to pay for quality. Every now and then, the market ignores it, and you can get it at a relatively cheaper price. But quality always trades where it should trade in the fullness of time. "
– EARNEST Partners LLC

Stocks of smaller, value-oriented U.S. companies overcame a broad market malaise early in the first quarter of 2016, brought on by concerns over global growth and falling oil prices, to rally over the last month and advance for the period. The Russell 2000® Value Index posted a return of 1.70% for the quarter, outperforming its growth and core peers, which both declined. The Federal Reserve’s decision not to raise interest rates helped buttress the market, as did a rebound in oil prices. The Utilities and Materials sectors posted double-digit returns to lead the small cap value index, and the majority of sectors delivered positive absolute results. Health Care and Energy were the only sectors that declined.
The Harbor Small Cap Value Fund posted a return of 2.83% in the first quarter, outperforming its Russell 2000® Value benchmark. Stock selection drove relative outperformance, particularly in the Health Care, Materials and Information Technology sectors. Within Health Care, Cantel Medical, one of the Fund’s largest holdings during the quarter, was a meaningful contributor. Coatings maker Valspar led Materials, driven by a takeover bid. A number of Information Technology positions were additive, including laser products company Coherent. Bristow Group, a transportation support firm for offshore oil and gas firms that was sold during the period, was among the top detractors. Sector allocation detracted slightly overall, but a substantial underweight to Financials and overweights to Materials and Information Technology helped drive relative gains.
Portfolio Manager Paul Viera’s comments were made in an April 12, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2016.

Interview Highlights

On Selecting Stocks
We're going to continue to look for opportunities, on a company-by-company basis, that we think are mispriced relative to their prospects. That could take us to any sector. We don't have any that we're particularly down on or particularly optimistic about. It's all a function of a particular company’s opportunity set relative to what we have to pay for that opportunity set.
View on Energy
All of the purchases in the quarter were Energy names. The pain had gotten to such a severe level and persisted for so long that supply was being taken off the market during the quarter, at a level we hadn’t seen in prior periods. We looked for companies strong enough to persist if oil prices remain low, and companies that were positioned to benefit if oil prices were to rise. We were looking for companies that have a low marginal cost of extraction, and we wanted to be more production-centric as opposed to refining-centric. The basic thought was that refining companies overall have done well in recent quarters, because their feedstock – petroleum – was relatively less expensive. But if more supply is taken offstream, we believe production companies should do relatively better. Those are the considerations that drove our purchases of PDC Energy and Gulfport Energy.
Taking a Look at Financials
During the quarter, Financials made up approximately 44% of the benchmark. The Fund’s weighting in the sector was less than half that, which aided in performance for the period. Cost pressures on financial firms have persisted for a variety of reasons. I think we're going to continue to be really focused in this second quarter on looking for opportunities in the Financials sector. Because it's such a big part of the benchmark, we want to make sure that we get that right. So, we may not buy Financials, but we sure are going to be looking at a lot of them, to make sure we don't miss any.

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.