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Small Cap Growth Opportunities Fund —
Equity markets fall early before rebounding in March
1st Quarter, 2016
"As we started the quarter, investors were in a dark mood, and sentiment got a lot worse. But interestingly, we saw a pretty good improvement in sentiment, and equities actually rallied and lifted by quarter end fairly significantly off their February lows. "
– Elk Creek Partners, LLC

Small cap growth stocks declined in the first quarter of 2016 amid concerns about China’s slowing economic growth and stock market volatility, as well as fears of a potential recession. Small cap growth stocks, as measured by the Russell 2000® Growth Index, posted a return of -4.68% for the quarter. Within the Russell index, the Health Care and Energy sectors were the weakest performers.
The Harbor Small Cap Growth Opportunities Fund underperformed its Russell 2000® Growth benchmark, with a quarterly return of -5.81%. Stock selection in the Industrials sector made it the largest detractor from relative performance for the quarter. The Health Care sector contributed to relative return, largely due to stock selection and a slightly underweight allocation.
Portfolio Manager Cam Philpott noted that a couple of the Fund’s largest holdings were negatively affected by near-term pressures. Top detractors from the Fund’s relative return included Gogo, Pacira Pharmaceuticals, and Aralez Pharmaceuticals, all of which posted significant declines for the quarter. In contrast, MaxLinear, the Fund’s largest position, performed well and contributed to relative return for the quarter.
Cam Philpott’s comments were made in an April 11, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2016.

Interview Highlights

Technology Holding as an Example
I think LendingTree is a great example of both the market’s behavior during the quarter and our investment focus. The company provides mortgage and personal loan leads between people looking for loans and institutions willing to make loans. Into year end 2015 and January’s volatility, the stock corrected. The company pre-released a very good quarter, but also talked about the mortgage market getting tougher, which led the market to sell off the shares dramatically. But we understand the company’s lead generation business model. We believe that a tougher market is actually good for LendingTree, because its leads are more valuable. If the market is robust, then institutions don’t have as much need for leads. The company announced a share buyback plan, and then reported guidance for 2016 above our expectations. So, I think the concerns about a tougher market leading to a weak year were misplaced.
Biotechnology Positioning
Many of the biotechnology companies in the benchmark are still in the process of doing clinical trials or have compounds at the FDA trying to get to market so that they can sell a product. We own biotechnology companies that have a product on the market. Ariad Pharmaceuticals is one such holding. The company has a leukemia drug that treats a genetic variant of the disease, and it is the only approved leukemia drug to treat that variant.
China’s Equity Markets Unnerve Investors
We saw dramatic mood swings this past quarter. As we started the quarter, investors were in a dark mood, and sentiment got a lot worse. Global markets were certainly unnerved by some of the activity in China’s equity markets. There was some dramatic selling overseas, and commodities really struggled amid concerns about global growth. But interestingly, we saw a pretty good improvement in sentiment, and equities actually rallied and lifted by quarter end fairly significantly off their February lows.
Delayed Earnings Releases Help Markets Recover
Since most companies are on a calendar year end, many fourth quarter reports fell into February and March. So I think as the markets saw more data, they improved. In addition, Fed Chair Janet Yellen gave a speech near the end of the quarter that seemed to calm some fears that the Fed was on an autopilot series of rate hikes in the face of weakening global macroeconomic conditions.
Investors Remain Concerned, but We’re Optimistic about Fundamentals
Although stocks are generally down for the year overall, the underlying investor angst feels a little bit lessened from what it was in the middle of the first quarter. I feel like investor sentiment is certainly better than it was in February, but it’s still challenged. I think that investors are concerned about growth prospects, and that they want to see what kind of company reports we get. I think the data on payrolls in March were very good, and manufacturing surveys are fine. I feel very good about the corporate reports for companies in the portfolio, so I’m optimistic about the fundamentals we’re seeing.

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.