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Small Cap Value Fund —
Small cap value stocks lose ground in Q2
2nd Quarter, 2015
"Equities are more expensive than a year or two ago but not outside the bounds of realistic valuations. "
– EARNEST Partners LLC

Value-oriented shares of smaller U.S. companies declined in the second quarter of 2015, with the Russell 2000® Value Index posting a return of -1.20%. Health Care stocks were the strongest performers within the index, with a return of 4.16%. All other sectors lost ground except Financials, which was essentially flat.
The Harbor Small Cap Value Fund posted a return of -1.47%, underperforming the index. For the year-to-date period, the Fund was up 2.88%, more than doubling the YTD return of 0.76% for the index. Stock selection within Health Care, Energy, Utilities, Telecom and Consumer Discretionary helped Fund performance relative to the index. An above-benchmark weighting to Health Care also boosted relative performance although this was offset by an overweight exposure to the weaker performing Industrials and Information Technology sectors. Sector weights 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 included Health Care stocks Centene, a provider of health care insurance solutions to the under-insured or the uninsured, Cantel Medical Corp., a manufacturer of infection control equipment, and Global Payments, a provider of electronic transaction processing services. Detractors from performance included freight container leasing firm CAI International, annuity and life insurance firm American Equity Investment Life Holding Company, and lawn and garden products specialists Scotts Miracle-Gro.
Portfolio Manager, Paul Viera, reports that Financials continued to be the most significantly underweight area of the Fund representing about 21% of the portfolio compared with about 42% of the small cap value index. As of June 30, the largest overweights relative to the benchmark were Information Technology, Industrials and Health Care.
Paul Viera’s comments were made in a July 15, 2015 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2015, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2015.

Interview Highlights

Implications of Greece
Q2 was negatively influenced by Greece. Greece is an insignificant contributor to world GDP; however, the broader implications for the eurozone weighed heavily on equity markets during the quarter, leading to significant volatility in global equity markets. The fear with Greece is that it could create a contagion effect across Europe, which could lead to a complete dissolution of the European Union which would have a negative effect on global equity markets.
Fed and GDP
Q2 was also negatively influenced by uncertainties within the U.S. economy. The expectations for rising U.S. interest rates were noticeable in Q2 as the specter of a more hawkish Federal Reserve weighed on equity valuations. Lower interest rates have buffered equity valuations and any change in direction, most notably higher, could lead to more equity market volatility in the future. In addition, GDP numbers in the U.S. have been tepid, falling short of 3% despite higher expectations.
Stock Picking
Stock selection is a driver of outperformance for the Fund relative to the index over the long-term. During Q2, stock selection across sectors was quite strong.
Evaluating Investments
Equities are more expensive than a year or two ago but not outside the bounds of realistic valuations. Valuation levels for small cap value companies are at reasonable levels and we are finding attractive opportunities for reinvestment. Two names were sold from the portfolio and two names were purchased during the quarter. Life Time Fitness was sold after being acquired at an attractive premium and First Interstate Bank was sold because of its exposure to energy lending jurisdictions. The portfolio added ManTech, an IT provider to the federal government, and United Natural Foods, a provider of natural and organic foods.

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.