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Mid Cap Value Fund —
Mid cap value stocks beat growth peers for the quarter and year
4th Quarter, 2016
"Value stocks, and particularly stocks that are cheap based on earnings and cash-flow valuation measures, performed well, which helped the Fund, given our emphasis on earnings and cash-flow measures. "
– LSV Asset Management

The fourth quarter of 2016 marked a fifth consecutive quarter of advances for U.S. equities, as the S&P 500 rose 3.82% for the period. After a slow start to the 2016 calendar year, U.S. stocks recovered and posted strong gains, with the S&P 500 closing out the year with an 11.96% advance. Low-volatility stocks significantly outperformed the broad market in the first half of the year, but suffered a sharp reversal in the second half, and were further negatively impacted when the U.S. Federal Reserve increased its key interest rate in December.
In this environment, value stocks generally outperformed growth stocks for the quarter and the year, and small-cap stocks generally outperformed both mid- and large-cap stocks. The Fund’s benchmark, the Russell Midcap® Value Index, advanced 5.52% in the fourth quarter, while the Russell Midcap® Growth Index returned 0.46%. For 2016, the benchmark’s 20.00% one-year return was nearly three times bigger than the return of its growth peer.
The Harbor Mid Cap Value Fund advanced 10.35% during the fourth quarter, outperforming its benchmark. The market environment, which saw strength in cyclical sectors compared to more defensive sectors, such as Utilities and Real Estate, boosted relative returns. The Manager believes that many defensive and low-volatility stocks are relatively expensive, and has held an underweight in those areas compared to the benchmark. Financial stocks significantly outperformed other sectors during the three-month period, advancing 19.40% in the benchmark. Many Financials stocks rallied after the U.S. election, on expectation of less regulation and high interest rates. The Fund’s relative outperformance was driven primarily by the combination of security selection and an overweight in that sector, and by stock selection in Industrials. Conversely, stock selection and an above-benchmark allocation in Consumer Staples had a limited negative impact on relative returns.
LSV Asset Management’s comments were made in a January, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended December 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through December 31, 2016.

Interview Highlights

Market Moves Helped Fund
The market environment, with more cyclical sectors of the market doing well, specifically Financials, helped given our overweight to these sectors. In addition, for the second consecutive quarter, the poor results for defensive sectors such as Utilities and Real Estate helped, given our underweight positions there. The Federal Reserve’s December interest-rate increase had a negative impact on the lower volatility stocks that we have found relatively expensive.
Modeling with Metrics
The Fund was overweight Consumer Discretionary, driven by stocks that are attractive from a valuation standpoint. As an example, we added to a position in Penske Automotive Group, which we initiated in August. Penske ranks high on our valuation metrics, particularly on earnings measures. In addition, the company is buying back shares, and insiders are buying stock in the company. Those trends are both positive indicators on our model. Penske has also exhibited strong price and operating momentum.
Valuations Remain Attractive
We do not develop an outlook or use any macro forecasts in our investment decision-making process. However, we do track the portfolio’s relative valuation. While valuations of the Fund and the benchmark continue to move higher, the Fund trades at a significant discount to the overall market, as well as to its benchmark. The Fund remains attractive based on several measures. At the end of the quarter and the calendar year, the Fund traded at 13.2 times forward earnings, compared to 18.9 times for the Russell Midcap® Value Index; 1.7 times book value, compared to 1.9 times for the index; and 8.3 times cash flow, compared to 12.0 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.