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Mid Cap Value Fund —
Mid cap value stocks recorded solid advance in Q2, led by Energy and Utilities
2nd Quarter, 2014
"U.S. equity benchmarks are looking richer in valuation, there's no doubt about that. But I think one reason why equity markets have held up pretty well is that bonds look even richer. "
– LSV Asset Management

U.S. equities posted positive returns for the second quarter of 2014, with large cap and mid cap stocks generally outperforming shares of smaller companies. The Russell Midcap® Value Index returned 5.62%. All 10 sectors of the index advanced, led by Energy and Utilities.
The Harbor Mid Cap Value Fund recorded a return of 4.41% trailing its Russell Midcap® Value benchmark for the quarter. The Fund is managed by LSV Asset Management. Stock selection had an overall negative impact on Fund performance in the latest quarter, while the effect of sector selection was mixed, according to Bhaskaran Swaminathan, Director of Research for LSV Asset Management. From a sector standpoint, underweights in REITs and Utilities had a negative impact on results. However, this was offset by a larger-than-index allocation to Energy stocks. Stock selection in the Energy and Materials sectors proved to be the biggest detractor from Fund returns relative to the index; this was offset in part by favorable selection in the Financials sector.
Top individual performers in the portfolio included Information Technology names Amkor Technology and Entergy, along with Questcor Pharmaceuticals in the Heath Care sector, Swaminathan reports. Among the bigger detractors from absolute returns were Domtar in the Materials sector, Tyson Foods in the Consumer Staples sector, and Brocade Communications in the Information Technology sector.
Bhaskaran Swaminathan’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

Sector performance
Energy stocks led in the second quarter, benefiting from an increase in oil prices due to geopolitical tensions in Iraq. High-yielding sectors, such as REITs and Utilities, continued to perform well and were the best performing sectors on a year-to-date basis. Technology stocks also did well in the second quarter, while Financials lagged.
Value index leaders
Value has been outperforming growth and one might think an environment like that should be favorable to deep value investors like ourselves. Historically that has been the case but not so far this year. I think it is due at least in part to the fact that within the mid cap value index the more expensive value names are the ones that have done better - not the deeper value names. That obviously does not help us.
Benchmark rebalance
The annual Russell Midcap® Value Index rebalance was effective June 30. The most significant changes to the benchmark were increases in the Materials and Consumer Discretionary exposures and decreases in Energy and Industrials. The most significant changes to sector weights in the portfolio were an increase in exposure to Consumer Discretionary stocks and decreases in Materials, Consumer Staples, and Health Care. As of June 30, the Fund was overweight in the Energy, Consumer Discretionary, and Information Technology sectors while underweight Health Care, Utilities, and REITs.
Richer valuations
We think valuation spreads between the Fund and the benchmark are in line with historical averages. Compared to where they were last year, I would say they are very similar. U.S. equity benchmarks are looking richer in valuation, there's no doubt about that. But I think one reason why equity markets have held up pretty well is that bonds look even richer. If bond yields were to rise significantly, say to 3.5 or 4%, then I think the equation could change.
Quarter end metrics
There was very little change to portfolio valuations during the quarter. As of June 30, the Fund was trading at 12.8 times forward earnings compared to 16.9 times for the Russell Midcap® Value Index, 1.7 times book value compared to 1.9 times for the mid cap value benchmark, and 8.1 times cash flow compared to 11.2 times for the benchmark.

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.