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Small Cap Value Fund —
Strong advance for small cap value stocks
3rd Quarter, 2016
"We don't 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. "
– EARNEST Partners LLC

Small cap value stocks, represented by the Russell 2000® Value Index, had the strongest quarterly return in close to two years. The index advanced nearly 9% in the third quarter of 2016. Once again, the U.S. Federal Reserve’s (Fed’s) decision on when to raise rates for the first time this year captured investor's focus. Heightening expectations for a rate increase in December made dividend-paying equities less attractive to investors, sending Utilities and Telecom Services stocks into negative territory for the quarter. Instead, investors flocked to growth-prone sectors such as Technology and Health Care; biotechnology companies were one of the largest beneficiaries of this shift.
The Harbor Small Cap Value Fund posted a solid return of 6.52% in the third quarter, but lagged the 8.87% return for its benchmark, the Russell 2000® Value Index. Market conditions during the quarter were less favorable to the Fund’s investment approach, as valuations deviated from fundamentals in certain areas of the market. The Fund’s lack of exposure to the biotechnology industry was a headwind to relative performance during the period. Conversely, underweight exposure to the Real Estate and Utilities sectors buoyed relative returns.
EARNEST Partners’ comments were made in an October, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2016.

Interview Highlights

Economic Backdrop
At its meeting in September, the Fed decided to maintain the target range for the federal funds rate at 0.25% to 0.5%. While the Fed minutes noted that the labor market has continued to strengthen and that economic growth improved in the first half of the year, inflation is still below the 2% annualized target rate. Fed chair Janet Yellen stated that the case for an increase had strengthened, but decided to wait for continued progress towards the Fed’s objectives. The Fed cited declines in energy prices and non-energy imports as contributors to the below-target inflation rate. Unemployment held steady at around 4.9%, and revised second quarter gross domestic product (GDP) growth of 1.4% showed that economic expansion was stronger than the previously estimated 1.1%. Fed officials now see long-term GDP growth to be 1.8%, below the previous 2% estimate in June.
Sector Allocation Relatively Constant
The portfolio remained overweight the Technology sector during the quarter as compared to the benchmark because we have found more attractive individual opportunities in Technology relative to other sectors. In addition, we maintained the portfolio’s relative underweight to the newly established Real Estate sector, as we have found fewer individual opportunities among real estate investment trusts (REITs).
EARNEST Partners doesn’t have a formal outlook on the market. We continue to believe small cap value equities are a part of a prudent overall allocation strategy. Our view on what ultimately drives relative returns has not changed, and is inherent in our ability to identify and take advantage of mispricings in the market on an individual stock-by-stock basis. We continue to position the portfolio based on the underlying fundamentals of individual companies and the growth prospects relative to what is currently reflected in the stock price.

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.