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Mid Cap Value Fund —
Value stocks underperform
3rd Quarter, 2015
"When we look at stock valuations today compared to historical levels, other than a couple of periods like the end of 2008, and maybe 2011, the valuations look very attractive. "
– LSV Asset Management

Value stocks in broad market indices delivered negative absolute results for the quarter and continue to lag returns from growth stocks on a year-to-date basis. The Russell Midcap® Value Index was down -8.04% during the quarter, led lower by cyclical stocks in Energy, Materials, and Industrials.
The Harbor Mid Cap Value Fund declined by -8.70% during the quarter, underperforming the benchmark by -0.66%. Bhaskaran Swaminathan, Director of Research for LSV, the Fund's Subadviser, reported that the Fund’s sector positioning was additive to relative performance while stock selection was a detractor. Generally, LSV’s deep value style of investing will not hold up well in a flight to quality market, which was the case in the third quarter as worries about the slowdown in China and its implications for global growth prospects negatively impacted markets. Specifically, underweights to perceived safer income-producing REITs and Utilities were negative contributors as both areas outperformed.
Stock selection in Consumer Discretionary also detracted from performance while an underweight to Energy and good stock picking within that sector partially offset the Fund’s negative relative results. Within Consumer Discretionary, multiline and specialty retailers Kohl’s, Macy’s, and Gap detracted the most as these positions declined by more than 20%. Within Energy, avoiding some of the more cyclical firms such as Marathon Oil was additive. An overweight to Tesoro, which was up approximately 16% for the quarter, was also additive.
Bhaskaran Swaminathan’s comments were made in an October 14, 2015 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1, 2015 through September 30, 2015.

Interview Highlights

Mixed Economic Data
The Federal Reserve did not increase interest rates as was anticipated at the September meeting due to concerns about global growth. Economic data was generally positive in the U.S. with second quarter GDP revised up from 3.7% to 3.9%. Consumer confidence indicators as well as auto and home sales also continued to show improvement. Unemployment remained low at 5.1%, but the labor force participation rate declined to levels not seen for nearly 40 years. Commodity prices came under pressure negatively impacting several sectors of the market.
Challenges for Active Management in Q3
Uncertainty around interest rate changes by the Federal Reserve along with global growth concerns primarily focused on emerging markets led to equity market volatility and headwinds for active managers. However, this market dislocation has created valuation opportunities across the board that are very attractive for our investment approach. We are still buying what we believe are high quality names with good, strong cash flows, good earnings forecast, and at very attractive valuations. When we look at stock valuations today compared to historical levels, other than a couple of periods like the end of 2008, and maybe 2011, valuations look very attractive.
Relative Portfolio Valuations
Given the decline in the markets, portfolio valuations became more attractive during the quarter. The Fund trades at 11.1 times forward earnings compared to 16.7 times for the Russell Midcap® Value Index, 1.5 times book compared to 1.6 times for the index, and 7.3 times cash flow compared to 9.6 times for the index.
Portfolio Changes
The most significant changes to the relative sector weights were increases to Energy and Industrials stocks and decreases in exposure to Health Care and Consumer Discretionary stocks. At quarter end, the Fund was overweight the Consumer Discretionary, Industrials, and Technology sectors while underweight Energy, Utilities, and REITs. All other sectors were within +/-2% of the benchmark. At the industry level, the Fund was overweight specialty retail while underweight oil and gas, health care equipment, and REITs.

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.