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Small Cap Value Fund —
Small cap value stocks post Q2 advance, led by Utilities and Energy
2nd Quarter, 2014
"We don't pay much attention to what a stock did yesterday. Instead we say, given the prospects that it has today, do we think this stock is the best thing we could own in concert with the other names in the portfolio? "
– EARNEST Partners LLC

Shares of smaller U.S. companies moved higher in the second quarter of 2014. Small cap value stocks returned 2.38% for the quarter, as measured by the Russell 2000® Value Index. Seven of the 10 economic sectors in the index gained ground, led by Utilities and Energy. The Telecommunication Services, Materials, and Consumer Staples sectors posted negative returns.
The Harbor Small Cap Value Fund returned 2.38% for the quarter, matching the return of its Russell 2000® Value benchmark. Portfolio Manager Paul Viera reports that stock selection in the Information Technology and Financials sectors helped Fund performance relative to the index, while selection in the Energy sector weighed on relative results.
Leading individual performers in the portfolio included Protective Life in the Financials sector, Timken in the Industrials sector, Centene in the Health Care sector, SBA Communications in the Telecommunication Services sector, and Sanmina in the Information Techology sector. The biggest detractors from absolute performance included Core Laboratories, an Energy sector stock, and Covance in the Health Care sector.
Paul Viera’s comments were made in a July 16, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2014.

Interview Highlights

Long-term appreciation
The market performed reasonably well in the quarter. The Russell 2000® Value Index was up about 2.4% and that number is very much in line with the long-term appreciation rate in the small cap world. I think it is a pretty good number.
Interest rates lower
The Federal Reserve has continued to cut back on its bond-buying program and there have been no ill effects. The concern was that if the Fed came out of the market, interest rates would rise and have a dampening effect on the market. So far, the reverse has occurred, at least as it relates to interest rates. The yield of the 10-year Treasury note started the year at about 3% and is lingering around 2.5% now. So despite tapering, interest rates have declined.
Rich valuations
We are in a world right now that is mad for yield, and some investors are seeing REITs as a fixed income surrogate. We are underweight in REITs because we think they are too expensive. Relative to historical valuations and to intrinsic value, they are very rich at current levels, in our view.
Portfolio metrics
The P/E ratio of the portfolio is lower than the benchmark. The debt-to-capitalization rate is lower than the benchmark. The earnings growth rate of the companies in the portfolio is greater than the benchmark. And despite having less leverage, the return on equity figures for the portfolio are significantly higher than the benchmark. That is classically how we've positioned the portfolio, as a result of our bottom-up individual stock selection.
Continuing review
We don't pay much attention to what a stock did yesterday. Instead we say, given the prospects that it has today, do we think this stock is the best thing we could own in concert with the other names in the portfolio? If the answer is yes, we will continue to own the name. If the answer is no, we will liquidate that stock from the portfolio and replace it with one that we think has more opportunity.

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.