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Small Cap Growth Opportunities Fund —
Most sectors lose ground as small cap shares decline in Q3
3rd Quarter, 2014
"Our approach is trying to understand: Does a company have a product or service that can gain share in a healthy end market and grow for a period of several years? "
– Elk Creek Partners, LLC

Share prices in the small cap segment of the U.S. stock market fell in the third quarter of 2014, with most economic sectors posting negative returns. The Russell 2000® Growth Index, a measure of smaller, growth-oriented companies, recorded a return of -6.13%. The Consumer Staples sector, up less than 1%, was the only area of the index to move higher.
The Harbor Small Cap Growth Opportunities Fund closely tracked the index, recording a return of -6.37%. The Fund began operations February 1, 2014. In the eight month period from its inception through September 30, the Fund returned 1.50%, while the Russell 2000® Growth benchmark had a negative return of -2.36%.
In the third quarter, portfolio holdings in the Information Technology sector were a strong contributor to Fund returns relative to the index, while Health Care stocks hurt relative performance, Portfolio Manager Cam Philpott reports. Among the best performers in the portfolio were Information Technology holdings Synchronoss Technologies and Aruba Networks, Health Care name Auxilium Pharmaceuticals, and XPO Logistics in the Industrials sector, all of which had share price gains of more than 20%. Major detractors from performance included Industrials holdings TriMas and On Assignment, Consumer Discretionary name RetailMeNot, and Goodrich Petroleum in the Energy sector.
Cam Philpott's comments were made in an October 10, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through September 30, 2014.

Interview Highlights

Sentiment shift
We saw generally positive returns at mid year and underneath the current of the market were concerns that inflation could create problems for the second half. Those concerns gradually disappeared during the third quarter, especially in September, and were replaced by worries about weak economic growth, especially overseas. We don't share those concerns in terms of their potential impact on small cap companies. The U.S. economy appears to be stronger than those overseas, and that typically is a more favorable environment for our asset class than it is for larger multinational companies with greater exposure to foreign economies.
Outlook for growth
Our approach is trying to understand: Does a company have a product or service that can gain share in a healthy end market and grow for a period of several years? Then we focus on the valuation of that investment opportunity and whether its share price is attractive at current levels.
Waiting for earnings reports
As long-time veterans of the third quarter reporting season, we recognize that this is a high-anxiety period for portfolio managers. The third quarter is notorious for volatile events and I think, typically more so than in other quarters, the average portfolio manager is reluctant to commit capital before the latest quarterly earnings have been announced. We generally believe that as we look out over the next four to five weeks we could see good earnings numbers, which should help stabilize the market.

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.