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Mid Cap Value Fund —
Equities continue to rally, but value lags growth
2nd Quarter, 2017
"The Fund continues to trade at a significant discount to the overall market as well as to the value benchmark. "
– LSV Asset Management

U.S. equities continued to advance during the second quarter of 2017, despite mixed economic data and higher interest rates. The S&P 500 Index reached all-time highs during the period. Gross Domestic Product growth for the first quarter was announced at an annualized rate of 1.4%, while unemployment ticked down to 4.3%, the lowest reading in 16 years. The labor force participation rate also declined. The Federal Reserve (Fed) raised interest rates by 25 basis points in June, the second such increase this year, bringing rates to their highest level since 2008. The Fed also confirmed its intention to increase rates later in the year. However, the 10-year Treasury bond yield, which rose during the quarter, remained below its level at the end of 2016.
For the second consecutive quarter, value stocks lagged growth stocks across all market cap ranges, after a strong performance for value stocks in 2016. Small and mid cap stocks trailed large caps, but only slightly. The Harbor Mid Cap Value Fund returned -0.13% during the second quarter of 2017, underperforming the Fund’s benchmark, the Russell Midcap® Value Index, which rose 1.37%. In comparison, the Russell Midcap® Growth Index returned 4.21% for the same period. Year-to-date through June 30, the value benchmark trailed its growth index by more than 6%.
The Consumer Discretionary sector was the primary driver of the Fund’s relative underperformance, due to stock selection. Information Technology also weighed on relative returns, again due to stock selection, which also tended to detract on an overall basis. Conversely, overall sector allocation added value during the period, as an underweight in Energy, by far the weakest performing sector in the benchmark, bolstered relative results. Stock selection in Energy and Materials also aided relative performance.
LSV Asset Management’s comments were made in a July, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2017.

Interview Highlights

Market Conditions Were Unfavorable
The poor environment for value stocks had a negative impact on the Fund, given our deep value bias. Value stocks trailed growth across all market cap ranges in the U.S. for the second consecutive quarter. While most sectors posted returns near the return of the Fund’s benchmark, Energy was an outlier, with a double-digit decline. As was the case in the first quarter, we were not overweight some of the sectors that struggled, including Energy, but cheaper stocks generally lagged in the quarter.
Following Our Model, Not Sectors
The Fund’s overweight to Industrials and Information Technology stocks increased, but these changes were primarily driven by Russell’s annual rebalance at the end of the quarter, as the weight of both sectors in the benchmark declined. Our sector exposures are driven by valuations of individual investments based on our stock-ranking model—we are overweight sectors where we find attractive stocks—and we continue to find attractive investments in Information Technology.
Attractive Portfolio Valuations
While 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. Broadly speaking, valuations did not change significantly during the quarter and benchmark valuations remained above their historical averages. The Fund continues to trade at a significant discount to the overall market as well as to the value 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.