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Mid Cap Value Fund —
Fund outpaces mid cap value benchmark, aided by stock selection
1st Quarter, 2015
"Even though the overall market has gone up in valuation, value stocks, relatively speaking, appear to be more attractive compared to growth. "
– LSV Asset Management

Mid cap value stocks registered positive results for the first quarter of 2015, with the Russell Midcap® Value Index posting a return of 2.42%. Equities in most sectors of the index gained ground, led by Health Care, up 12%.
The Harbor Mid Cap Value Fund returned 3.29%, outperforming the Russell Midcap® Value benchmark. The Fund is managed by LSV Asset Management. Bhaskaran Swaminathan, Director of Research for LSV, reports that stock selection boosted Fund performance relative to the benchmark while sector positioning detracted from relative results. Stocks in the Industrials and Energy sectors were among the Fund's strongest performers relative to the index, while holdings in the Financials sector lagged those in the benchmark. A smaller-than-index exposure to Health Care stocks hurt relative performance; this was partly offset by an underweighted position in Utilities, the weakest-performing area of the benchmark.
Top performers in the portfolio included department store chain Kohl's, Health Care sector stocks Cigna and United Therapeutics, oil refiner Tesoro, and defense contractor Exelis, which agreed in February to be acquired by Harris Corp. These companies posted share price gains ranging from 22% to 36% in the first quarter. Among the detractors from absolute returns were Information Technology stocks Western Digital, Seagate Technology, and Xerox; electric utility company Entergy, and auto-parts maker Meritor.
Bhaskaran Swaminathan’s comments were made in an April 13, 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

Global headwinds
Large global companies based in the U.S. are being negatively impacted by the rise in the Dollar, which makes U.S. goods and services more expensive in the global marketplace. Sluggish global growth also weighed on these companies. The Federal Reserve dropped its language about being patient in increasing rates. However, a rate increase is not expected to be imminent and any rate hike will be likely be dependent on how the economy performs in the coming months.
Disparity among sectors
There was a wide disparity in sector returns. After strong performance last year, Utilities lagged in the first quarter, posting a 4.1% loss. Energy stocks continued to struggle, declining 3.1%. Health Care stocks led the mid cap segment of the market, advancing 12%.
Tracking valuations
Portfolio valuations moved higher during the quarter but the Fund continued to trade at a discount to the Russell Midcap® Value benchmark. As of March 31, the Fund traded at 13.1 times forward earnings compared to 17.7 times for the benchmark, 1.8 times book value compared to 2.0 times book for the benchmark, and 8.6 times cash flow compared to 11.2 times for the mid cap value index. Even though the overall market has gone up in valuation, value stocks, relatively speaking, appear to be more attractive compared to growth. My view is that whenever you see that kind of relative valuation favoring value, it is usually a good signal for value going forward.
Favorable selection
As a deeper-value investor, we tend to do well in environments where value is doing well. The general pattern is that environments that are difficult for value stocks tend to be even more difficult for deep-value investment styles. However, there are times, like in the first quarter, when we can deliver added value relative to the benchmark because of better stock selection.
Energy exposure reduced
The forward earnings estimates that analysts are putting out for Energy companies have come down quite rapidly, more than their share prices have come down. As a result they don’t look as cheap as they did four or five months ago; they look a bit more expensive. That, combined with negative momentum, has had the effect of reducing the rankings of some of these companies in our model. That is why we have reduced our exposure to the Energy sector.

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.