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Small Cap Value Fund —
Stock selection boosts performance as Fund outpaces small cap value index
1st Quarter, 2015
"Equities in general are more expensive than they were two or three years ago but in our view they are still attractive. "
– EARNEST Partners LLC

Value-oriented shares of smaller U.S. companies moved higher in the first quarter of 2015, with the the Russell 2000® Value Index posting a return of 1.98%. Health Care stocks were the strongest performers within the index, with a return of 10%. Energy, down 10%, was the only sector to lose ground.
The Harbor Small Cap Value Fund posted a return of 4.42%, outperforming the index. Stock selection, especially in the Health Care, Industrials, and Consumer Discretionary sectors, helped Fund performance relative to the index. An above-benchmark weighting in Health Care stocks also boosted relative performance, although this was mostly offset by an overweighted exposure to the weak-performing Energy sector. 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 included composite materials maker Hexcel, Health Care stocks Centene and Molina Healthcare, fitness center operator Life Time Fitness, and homebuilder Meritage Homes. Detractors from absolute returns included Energy names Bristow Group and Core Laboratories, steel products maker TimkenSteel, and electronic equipment makers Itron and Checkpoint Systems.
Portfolio Manager Paul Viera reports that Financials continued to be the most significantly underweighted area of the Fund, representing about 20% of the portfolio compared with about 40% of the small cap value index. As of March 31, the biggest overweights relative to the benchmark were Information Technology, Industrials, and Health Care.
Paul Viera’s comments were made in an April 15, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2015.

Interview Highlights


Evaluating investments
Finding companies that are priced attractively relative to others that you could own is always difficult but I don’t know that it’s any more difficult now than it was last year or three or four years ago. We’ve made a few additions to the portfolio that we think are priced well against their prospects. Equities in general are more expensive than they were two or three years ago but in our view they are still attractive.
FX factors
The exchange rate that exists today can change pretty rapidly. Three months from now or six months from now it could be completely different. Because our investment horizon is longer than that, we don’t put a lot of emphasis on trying to predict changes in foreign exchange. What we try to focus on is whether we have companies that are really competitive. Sometimes their earnings are going to have a tailwind from FX and sometimes FX will be a headwind. But over a full investment cycle, our view is that good companies are going to perform well irrespective of the FX environment.
Boost for consumers
Oil prices continued to be relatively low, at least as compared to where they had been over the last few years. At a minimum, this provides what I would call the equivalent of a tax rebate to consumers. As we move forward we’ll see how the consumer is able to reposition those dollars into the economy and what that might mean for some securities.
Bottom-up analysis
We use a bottom-up, stock-by-stock approach. We look at individual companies, their competitive position, and the price that we would have to pay for them. Our experience has been that if we can find companies that are strong competitors in good industries and we’re able to invest at an attractive price, then typically the stocks should do pretty well over time and outperform alternative investments. That has been our approach from inception and we continue to carry that forward.

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.