News & Commentary

View all Commentary headlines

Small Cap Value Fund —
Small cap value shares surge in Q4 despite Energy sector weakness
4th Quarter, 2014
"We had six purchases in the quarter and the key point is that the individual names we bought don't fall into any one sector. It was very dispersed, which means that we were looking for the best companies we could buy, irrespective of a theme around particular sectors or industries. "
– EARNEST Partners LLC

After lagging behind for most of the year, shares of smaller companies outpaced the broad U.S. stock market in the fourth quarter of 2014. The Russell 2000® Index, a small company benchmark, returned 9.73%, while the broad U.S. equity market, as measured by the Russell 3000® Index, returned 5.24%.
Small cap value stocks, as measured by the Russell 2000® Value Index, posted returns of 9.40% for the fourth quarter and 4.22% for the full year. In the quarter, 9 of the 10 sectors in the index registered positive returns, while the Energy sector, representing about 4% of the index, posted a 33% decline.
The Harbor Small Cap Value Fund outperformed the Russell 2000® Value benchmark for the full year with a return of 7.88%. The Fund also outpaced the index for the latest 5-year and 10-year periods and since its inception in 2001. For the fourth quarter, the Fund returned 8.94%, lagging the index.
Portfolio Manager Paul Viera reports that stock selection, especially in the Energy, Health Care, and Information Technology sectors, helped Fund performance relative to the index in the both fourth quarter and the full year. An above-benchmark exposure to shares of Energy companies hurt returns relative to the benchmark, while an overweight in the Health Care sector boosted relative performance in both periods. Sector weights typically are a reflection of individual stock selection decisions for the Fund rather than an active element of portfolio strategy.
Leading contributors to absolute performance for the Fund in the fourth quarter included Information Technology names Sapient and Digital River, Health Care holdings Cantel Medical and Covance, along with WGL Holdings in the Utilities sector. Energy stocks were the biggest detractors from returns in the quarter, including Core Laboratories, Swift Energy, Newpark Resources, and ONEOK.
Paul Viera’s comments were made in a January 14, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2014.

Interview Highlights


Financials sector exposure
Financials in the fourth quarter, for the first time in a long time, were more than 40% of the benchmark. Our view over the last few quarters has been to underweight it in the Fund and we continue with that view. Although we’re underweight by almost 20 percentage points relative to the benchmark, we still have a very healthy exposure to Financials with about 22% of the portfolio. If we can find companies in that sector that are attractive compared with others we could own, then you will see us ratchet up our Financials exposure, but for right now that isn't a condition that we see.
Key overweights
The offset to our underweight in Financials has been an overweight divided essentially among three sectors, where we’ve found individual names that we thought had compelling value. The three sectors include Information Technology, where we’re overweight by about 10 percentage points, Industrials, with an overweight of about 9, and Health Care, with an overweight of about 6 percentage points.
Company-focused stock selection
We had six purchases in the quarter and the key point is that the individual names we bought don’t fall into any one sector. It was very dispersed, which means that we were looking for the best companies we could buy, irrespective of a theme around particular sectors or industries. There's a bank in there, there's an IT name, there's a Materials name, as examples of value that we found on an individual company basis and not on any thematic basis.
Portfolio profile
Overall, the characteristics of the portfolio are pretty much in line with what you've come to expect from our process. The return on equity of the portfolio names is about twice that of the benchmark, at about 11% versus about 5.5%. The forward price/earnings ratio of the portfolio is meaningfully lower than the benchmark, and the earnings-growth level of the portfolio is greater than that of the benchmark. Those are characteristics that have continued to be a pretty consistent outgrowth of our process.

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.