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Mid Cap Value Fund —
Value stocks underperform
2nd Quarter, 2015
"Given the underperformance of value stocks in the broad market indices, the percentages are in favor for a more favorable environment for value stocks going forward. "
– LSV Asset Management

Results for value stocks in broad market indices continue to lag returns for growth stocks. The Russell Midcap® Value Index was down approximately -2% during the quarter, led lower by stocks in Energy, Utilities, and REITs.
The Harbor Mid Cap Value Fund declined by -2.11% during the quarter. Bhaskaran Swaminathan, Director of Research for LSV, reported that the Fund’s sector positioning was additive to relative performance, while stock selection was a detractor. More specifically, underweights to REITs and Utilities were positive contributors as both areas lagged due to concerns of higher interest rates.
Stock selection in Materials added to performance, while stock selection in Technology and Industrials detracted. Top individual contributors during the quarter included industrial company Avery Dennison, specialty chemical manufacturer and distributor Eastman Chemical, media and entertainment provider Starz, and Goodyear Tire & Rubber. Stocks that detracted from performance included the semiconductor packaging company Amkor Technology and an underweight to the semiconductor company Broadcom, which received a buyout offer from Avago Technologies.
Bhaskaran Swaminathan’s comments were made in a July 14, 2015 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2015 unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2015.

Interview Highlights

Mixed Economic Data
Economic data was mixed in the U.S., but merger and acquisition activity continued in the quarter. M&A activity set records for strongest first half of a year in 2015. While first quarter GDP was down -0.7%, macroeconomic data picked up toward the end of the quarter. In particular, consumer confidence indicators and retail sales improved in the quarter. Bond yields increased some of the expectations that the Federal Reserve could hike interest rates as early as September. While M&A activity continues to be strong in the Health Care sector, Technology and Telecom Services companies were also involved in M&A activity in the quarter. The employment numbers continue to be positive, with the unemployment rate ending the quarter at 5.3%. However, labor force participation rates remain low by historical standards.
Health Care Valuations
The Health Care area, which was very attractive and cheap about three years ago, is now getting more expensive. The Russell Midcap® Value index provides a good example. The index rebalances annually, and this year’s rebalance led to a decrease in the weight of Health Care because many stocks in the Health Care sector can no longer be defined as value. You often see M&A activity and momentum pickup near the end of a cycle, which is what we see in Health Care today. While there are certain stocks that still meet our criteria in the Health Care sector, as a deep value investor, we avoid the kinds of stocks that are more expensive and being driven by momentum.
Relative Portfolio Valuations
Portfolio valuations were relatively unchanged in the quarter while the Fund continues to trade at a discount to the value benchmark. The Fund has a 12.5 times forward earnings ratio compared to 16.9 times for the value benchmark, 1.7 times book which is in line with the benchmark, and 8.1 times cash flow compared to 9.9 times for the Russell Midcap® Value index. Our approach places a premium on companies that are generating strong cash flow and earnings while also using measures such as book, sales, and yield. Given the underperformance of value stocks in the broad market indices, the percentages are in favor for a more favorable environment for value stocks going forward.
Portfolio Changes
There were no significant changes to portfolio positioning. Most of the changes in underweights and overweights were actually driven by the annual Russell index rebalancing. For example, our relative weight in energy increased; however this change was completely driven by the rebalance of the index. As of June 30, the Fund was overweight in Consumer Discretionary and Technology sectors while underweight Energy 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.