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Mid Cap Value Fund —
Markets hit all-time highs amid shift toward growth
1st Quarter, 2017
"After finishing strong in 2016, value stocks lagged in the first quarter of 2017 across all market cap ranges in the U.S. This had a negative impact on the Fund given our deep value bias. "
– LSV Asset Management

U.S. equities started the year strong, with the S&P 500 Index reaching all time highs during the first quarter of 2017. The S&P 500 advanced 6.07% for the period. Markets were supported by positive macroeconomic data, including strong employment numbers, as unemployment fell to 4.7%. Despite the Trump administration’s failure to pass health care legislation, investors appeared to remain optimistic regarding the administration’s ability to implement plans to lower taxes, decrease regulatory burdens and increase domestic spending. Given the positive macroeconomic outlook, the Federal Reserve raised rates by 25 basis points in March, with the expectation of additional rate increases this year.
There was a shift in market sentiment during the period, as stocks that initially benefited following the election reversed course. Value stocks, small caps and financials lagged in favor of growth, large caps and technology names. The Harbor Mid Cap Value Fund advanced 3.02% during the first quarter, underperforming its benchmark. The Fund’s benchmark, the Russell Midcap® Value Index, advanced 3.76% in the first quarter, while the Russell Midcap® Growth Index returned 6.89%.
The Consumer Discretionary sector was the primary driver of relative underperformance, due to stock selection, which had a negative impact overall. Utilities also weighed on relative returns, again due to stock selection. Conversely, sector allocation added value during the period, as an underweight in Energy, by far the weakest performing sector in the benchmark, bolstered relative results. An overweight allocation in Information Technology also aided relative performance, though those gains were reduced somewhat by stock selection in the sector.
LSV Asset Management’s comments were made in an April, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended March 31, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2017.

Interview Highlights


Sentiment Shift Impacts Results
The shift toward more growth-oriented sectors of the market during the quarter had a negative impact on results, given our deep value bias. After finishing strong in 2016, value stocks lagged across all market cap ranges in the U.S. during the first quarter.
Model Investment
While we are overweight technology relative to the benchmark, we continue to find attractive investments in the sector, driven by our stock ranking model. During the quarter, we initiated a position in HP, which was a particularly attractive investment based on our cash flow and earnings measures. Long-term past performance has been poor, which is also a positive in our stock-ranking model, but the stock has shown recent signs of improvement. Finally, the company has been buying back shares, another positive sign in our model.
Trading at a Discount
We neither develop an outlook nor use macro forecasts in our investing process, though we do track the portfolio’s valuation relative to the benchmark. While benchmark valuations are above historical averages, the Fund continues to trade at a significant discount, not only to the value benchmark, but also to the overall market.

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 www.harborfunds.com.

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.