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Mid Cap Value Fund —
Equities rebound in Q4
4th Quarter, 2015
"I think a correction is healthy. Stocks cannot always go up and investors cannot just believe that they will always go up. So I think these kinds of actions can be helpful in finding a great entry point. "
– LSV Asset Management

Economic data continued to be generally positive. The final Q3 GDP report came in as expected at 2%, although down from second quarter GDP growth of 3.9%. Unemployment ticked down slightly to a seven year low of 5%. Oil prices continued to be under pressure, settling into a range in the mid to upper 30s. Merger and acquisitions continued at a record pace.
Against this backdrop, U.S. equities advanced across all market cap ranges with large cap stocks leading the way. Value stocks lagged across all market cap segments, and among mid cap stocks, value stocks lagged by 1% in the quarter and 4.5% for the year. Within the Russell Midcap® Value Index, energy stocks continued to perform poorly, declining 7.8% in the quarter, and finishing down nearly 40% for the year.
The Harbor Mid Cap Value Fund was up 2.24% in the fourth quarter, while the Russell Midcap® Value Index was up 3.12%. Sector selection added value, while stock selection detracted in the quarter. From a sector standpoint, the Fund’s underweight to Energy and overweight to Technology had a positive impact on results as Energy stocks continued to lag while Technology stocks appreciated. While stock selection was strong in the Energy sector, this was offset by poor selection among Consumer Discretionary and Technology stocks. Top individual contributors in the quarter included PBF Energy, Amkor Technology, DuPont Fabros Technology, Smith & Wesson, Netgear, and an underweight to Freeport-McMoRan. Detractors included Cummins, Macy’s, Bed Bath & Beyond, and underweight to Technology stocks SanDisk, NVIDIA and Activision Blizzard.
LSV’s Director of Research Bhaskaran Swaminathan’s comments were made in a January 15, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2015, unless otherwise indicated. All references to the year-to-date are for the period January 1, 2015 through December 31, 2015.

Interview Highlights

Opportunities in Energy
The particular names that we picked up, companies like Ensco, HollyFrontier, Oceaneering International, and Rowan Companies, are equipment service companies, so they're not directly into the exploration business. They're more on the service side. Ship Finance International, another holding, is kind of an oil transportation service company. I think the valuations of those companies in terms of their capital are still pretty strong, EBITA is very strong, cash flow is strong. Again, given the long investment horizon we have, I think we'll be fine with those holdings.
Recent Volatility
I don't think there's as much leverage in the system today as there was in 2008/2009, so I think a correction is healthy. Stocks cannot always go up and investors cannot just believe that they will always go up. I think these kinds of actions can be helpful in finding a great entry point, not just for institutional investors like us, but also for a lot of individual investors who have been sitting on cash for quite some time. So, we believe a 10-20% decline in the market would be a great entry point for long-term investors.
Portfolio Metrics
Portfolio valuations remain attractive on multiple valuation measures. The Fund is trading at 11.1 times forward earnings, compared to 17.1 times for the Russell Midcap® Value Index; 1.5 times book, compared to 1.6 times for the index; and 7.4 times cash flow, compared to 10.2 times for the index.
The most significant change to the relative sector weights was an increase to energy stocks. Stock selection was strong in the sector, and we added to current holdings in the sector on rebalances and positive cash flow into the Fund.

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.