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Small Cap Value Fund —
Modest returns for small cap value stocks
2nd Quarter, 2017
"Our investment decisions are made based on a company's individual opportunities to grow earnings and take market share. "
– EARNEST Partners LLC

U.S. small cap equities advanced minimally in the second quarter of 2017. Against that backdrop, the Harbor Small Cap Value Fund posted a positive return of 1.34% for the quarter, outperforming its benchmark, the Russell 2000® Value Index, which returned 0.67%. Sector allocation and stock selection both contributed to relative performance overall. Notably, stock picking and overweight positions in both Health Care and Information Technology were beneficial. The top detractor was Industrials, in which negative stock selection more than offset the positive impact of being overweighted in the best performing sector in the benchmark.
EARNEST Partners’ comments were made in a July, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2017.

Interview Highlights


Economic Backdrop
Investors anticipated a rate hike by the U.S. Federal Reserve (Fed) during the quarter, and the Fed met the market’s expectations at its meeting in June. The Fed voted to increase the target range for the federal funds rate by 0.25%, to the range of 1.00% to 1.25%, the fourth rate increase since the end of 2015. The Federal Open Market Committee noted that a strengthening labor market, expanding business fixed investment and a declining unemployment rate all contributed to its decision. The Fed raised rates despite inflation having declined on a 12-month basis and running somewhat below the Fed’s 2% target. As in March, the committee stated that as the economy continues to improve, inflation is expected to pick up, meaning that further increases in the federal funds rate may be warranted. First-quarter 2017 Gross Domestic Product (GDP) growth was revised up to 1.2% from 0.7%, and the unemployment rate fell to 4.3% in May from 4.7% in February.
Sector Allocations
The Fund entered the quarter with a relative overweight to the Information Technology sector. The portfolio is positioned this way as we have found more attractive individual opportunities in that sector relative to others. Our views on the Information Technology names in the portfolio have remained consistent since last quarter, and consequently we have continued to maintain a healthy overweight. Conversely, the Fund entered the quarter with a relative underweight to the Financials sector. We have found fewer individual opportunities among the banking industry within the sector, but relatively more among insurance companies and diversified financial institutions. We have maintained a consistent view on Financials for some time.
Underlying Fundamentals Drive Our Investment Decisions
EARNEST Partners does not maintain a formal outlook on the broader equity market. Rather, our investment decisions are made based on a company’s individual opportunities to grow earnings and take market share. Opportunities like these present themselves in all types of market environments. Our view on what ultimately drives relative returns has not changed, and is inherent in our ability to identify and take advantage of mispricing in the market on an individual stock-by-stock basis. We continue to position the portfolio based on the underlying fundamentals and growth prospects of individual companies relative to what is currently reflected in their stock prices.

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.