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Global Growth Fund —
Technology holdings weigh on fourth-quarter performance
4th Quarter, 2016

Please note: This commentary was provided by Marsico Capital Management, LLC, the subadviser to the Harbor Global Growth Fund. The Harbor Global Growth Fund was renamed the Harbor Global Leaders Fund with Sands Capital Management, LLC, as the subadviser effective March 1, 2017.

"We are more optimistic toward the U.S. economy, namely companies with heavy U.S. exposure in addition to the broad financial sector. "
– Marsico Capital Management, LLC

In the last quarter of 2016, financial markets were overwhelmingly captive to the somewhat surprising election triumph of Donald Trump. On the eve of the election, handicappers assigned very high odds to the notion that Hillary Clinton would win, but would ultimately face gridlock amid near certain control of the House of Representatives by Republicans. Instead, Trump won the presidency and will enter the White House with Republicans in charge of both the House and the Senate.

As global financial markets considered the implications of a Trump-led GOP's agenda seeking to reshape certain policies, stocks surged along with the U.S. Dollar and certain commodities linked to potential U.S. infrastructure rebuilding efforts. In contrast, risk-free sovereign bond prices plunged. These movements appeared to anticipate that fiscal stimulus and sharp regulatory relief would lift the U.S. economic trajectory, and that the rest of the world would benefit as well.
The Harbor Global Growth Fund declined in the third quarter, returning -6.31% and underperforming its benchmark, the MSCI All Country World (ND) Index, which advanced 1.19%. Stock selection in both Information Technology and Consumer Discretionary had a significant negative impact on relative returns. Conversely, having no exposure to Real Estate, a sector that struggled during the quarter, had a positive effect.
Marsico Capital 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

Economic Developments
Two of the most striking developments in the fourth quarter were the leap in U.S. Treasury bond yields and the sharp rise in the U.S. Dollar compared to other major currencies. As investors digested an anticipated shift from budgetary austerity to potential large tax cuts, major increases in infrastructure and defense spending and loosening of regulations, it became clear that growth could increase and U.S. interest rates could rise substantially. The U.S. 10-year Treasury yield jumped from just under 1.70% to 2.45% during the period. The Dollar's ascent directly followed the performance of U.S. interest rates. With both the European Central Bank and the Bank of Japan committed to continued "easy money," investors judged that flows would migrate to the higher yielding fixed income marketplace, and the U.S. Dollar jumped accordingly. Meanwhile, inflation over the fourth quarter remained modest. In the U.S., average hourly earnings rose by 2.5% year-on-year. The rebound for oil and other commodity prices suggests further pick-up going forward. However, the continued strength of the U.S. Dollar is likely to be a powerful countervailing force.
An Emphasis on Millennials
The Fund's largest overweight allocations relative to the benchmark continued to be in Information Technology and Consumer Discretionary, areas we consider to be the nexus for innovation and disruption. We believe that millennials will continue to reshape traditional modes of commerce—for example, sales of non-store retailers were up 11.9% in November versus a year earlier, suggesting that online sellers are taking market share from brick-and-mortar retailers due to the proliferation of online and mobile shopping. The media industry has also seen impacts from how media content is now priced and consumed, a trend we believe the portfolio is positioned to benefit from.
Broadly Optimistic Outlook
We are broadly more optimistic than we were at the start of the fourth quarter. To be clear, we still have concerns about global growth due largely to aging demographics, high levels of government debt and China's efforts to refocus its economy toward a more consumption-driven model. We're not overly optimistic about Industrials, Energy and Materials, as we still believe that a lot of spare capacity is sitting idle that was meant for continued economic momentum out of emerging markets, led by China. But we are more optimistic toward the U.S. economy, namely companies with heavy U.S. exposure, in addition to the broad financial sector. With unemployment at historic lows leading to wage gains, and consumer confidence and small business confidence rising, we expect to see higher consumption and therefore greater gross domestic product (GDP) growth domestically.

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