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Mid Cap Value Fund —
Mid cap value stocks solid in third quarter
3rd Quarter, 2016
"The Fund benefited from the market environment. More cyclical sectors in which we are overweight, particularly Information Technology and Consumer Discretionary, performed well. "
– LSV Asset Management

The third quarter of 2016 marked a fourth consecutive quarter of advances for U.S. equities. The S&P 500 rose 3.85% and markets generally rebounded after a brief sell-off following Brexit toward the end of the second quarter. Most of the focus during the third quarter was on central bank action. The U.S. Federal Reserve (Fed) left rates unchanged at its September meeting, though expectations of rate hikes by year end nonetheless increased. The European Central Bank also left monetary policy unchanged, while the Bank of England lowered rates and introduced additional easing measures following the Brexit vote. The quarter witnessed a reversal in market leadership as defensive areas of the market, which had outperformed over the first half of the year, struggled.
In this environment, while small and mid cap stocks generally outperformed large caps during the quarter, there was little difference between growth and value stocks in the mid cap segment. The Fund’s benchmark, the Russell Midcap® Value Index, was up 4.45%, while the Russell Midcap® Growth Index returned 4.59%. However, the benchmark, with a 13.72% year-to-date return, has outperformed its growth peer by nearly 7% thus far in 2016.
The Harbor Mid Cap Value Fund advanced 6.09% during the third quarter, outperforming its benchmark. The Fund’s relative performance was driven primarily by the combination of security selection and a significant overweight in the Information Technology sector. Conversely, stock selection and a below-benchmark allocation in Energy, one of the benchmark’s strongest sectors for the quarter and year-to-date, had a negative impact on relative returns.
LSV Asset Management’s comments were made in an October, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2016.

Interview Highlights

Favorable Market Conditions
The Fund benefitted from the market environment. The more cyclical sectors in which we are overweight, particularly Information Technology and Consumer Discretionary, performed well, while defensive sectors in which we are underweight, such as Utilities and Real Estate, had poor results. In addition, while there was little difference in the performance of growth and value stocks in the mid-cap universe, cheaper stocks based on earnings and cash flow measures did well during the quarter. The Fund benefitted, given our emphasis on earnings and cash flow valuation measures.
Turnaround for Lower-Volatility Stocks
We believe that expectations of an interest rate increase by year end had a negative impact on lower volatility stocks, which led the market in the first half of 2016. Those stocks lagged during the third quarter, a trend that helped the portfolio given our underweight to those stocks. We have avoided lower volatility stocks recently, as we do not find them attractive from a valuation standpoint.
Attractive Portfolio Valuations
Though we do not develop an outlook or use any macro forecasts in our investment decision-making process, we do track the relative valuation of the portfolio, and it remains attractive on multiple measures compared against the averages for its benchmark. At quarter end, the Fund traded at approximately 12.0 times forward earnings, compared to 18.2 times for the Russell Midcap® Value Index; 1.6 times book value, compared to 1.8 times for the index; and 7.6 times cash flow, compared to 11.8 times for the index.

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.