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Small Cap Growth Opportunities Fund —
Most sectors gain ground as small cap growth stocks post solid advance in Q1
1st Quarter, 2015
"Our underlying belief is that within this asset class you can find companies with a better product or a better service that are taking share and growing revenues and earnings, even if the broader economy isn't operating at full capacity. "
– Elk Creek Partners, LLC

Shares of smaller U.S.-based companies generated solid results for the first quarter of 2015. The Russell 2000® Growth Index, a measure of growth-oriented companies in the small cap segment of the market, returned 6.63% for the three months ended March 31, 2015. Most economic sectors in the index gained ground, led by Utilities and Health Care. Telecommunication Services and Consumer Staples were the only sectors not to post positive returns.
The Harbor Small Cap Growth Opportunities Fund returned 3.69%, trailing the index. Stock selection hurt Fund performance relative to the index, as holdings in the Health Care and Consumer Discretionary sectors lagged those in the benchmark. In addition, a smaller-than-index exposure to Health Care, one of the best performing sectors in the quarter, also weighed on relative returns. Portfolio Manager Cam Philpott notes that those negative factors were partly offset by holdings in the Information Technology sector, which outpaced those in the index. Sector allocations in the portfolio generally are a result of individual stock selection choices rather than an active component of investment strategy.
Information Technology companies Aruba Networks, Synchronoss Technologies, FleetMatics Group, and Procera Networks were among the top performers for the Fund, as was in-flight Wi-Fi provider Gogo. Aruba Networks agreed in March to be acquired by Hewlett-Packard. Stocks that detracted from absolute returns included biomedical products company Cerus, hardwood flooring retailer Lumber Liquidators, home furnishings retailer Tuesday Morning, business services provider WageWorks, and medical claims services provider HMS Holdings.
Cam Philpott's comments were made in an April 13, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2015.

Interview Highlights

Volatile markets
In the last two quarterly reporting seasons we saw really sharp corrections before the actual earnings numbers came out, which I would view as sign of anxiety. There was a sharp correction in the first half of October and then again in the month of January. Both times, after companies reported their actual results, we saw stocks do much better. I think some of this is just investor angst about what businesses and stocks are going to do once the Fed actually starts to raise rates.
Longer-term focus
Aruba Networks was a good stock for us and I think it illustrates the short-term focus of some investors. Last November Aruba reported a good quarter and management gave guidance in line with Wall Street expectations. Many short-term investors were disappointed that the management team didn’t raise guidance and they sold the stock pretty hard. In February Aruba reported another good quarter, better than the previous guidance, and then in early March Aruba agreed to be acquired by Hewlett-Packard. We're pleased that our patience was rewarded, driven by the company's fundamentals and then by the acquisition.
Earnings-driven markets
Given the way that valuations have risen over the past several years, we think that returns will be driven primarily by earnings in 2015 and not by further expansion of P/E multiples. You typically don’t see valuations expand into an environment of rising rates. Our view is that multiples have done their share of the work for equity returns over the last several years and that we’ll see strong earnings carry portfolio performance as we move through the year. I think solid underlying numbers and profit growth could go a long way toward calming some of the anxieties that we have seen in the market.
Consistent process
Our process stays the same irrespective of the environment. Our underlying belief is that within this asset class you can find companies with better products or better services that are taking share and growing revenues and earnings, even if the broader economy isn’t operating at full capacity. From our perspective the mandate remains the same: go find those companies that are growing and taking share.

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.