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Small Cap Growth Opportunities Fund —
Strong absolute and relative performance in spite of market headwinds
4th Quarter, 2015
"At the end of the day, we are focused on domestic businesses. Our strength is looking at businesses and deciding if they have the competitive advantages to sustain growth. "
– Elk Creek Partners, LLC

After a relatively difficult third quarter, small cap growth stocks ended the year higher due to better domestic macroeconomic data through October and November. The Russell 2000® Growth Index, a measure of growth-oriented companies in the small cap segment of the U.S. market, was up by 4.32% for the three months ended December 31, 2015. The majority of economic sectors increased during the period, with Health Care, Information Technology, and Telecommunication Services improving the most.
The Harbor Small Cap Growth Opportunities Fund gained 6.90% for the quarter, outperforming its benchmark by 2.58%. Stock selection helped performance relative to the index. Selections within the Information Technology and Consumer Discretionary sectors were the largest contributors. In Technology, Shutterfly had strong holiday sales leading to better returns. Another contributor to the portfolio, HomeAway, benefitted from being taken over by Expedia during the quarter. In Consumer Discretionary, shares of MDC Partners were up after a CEO change in the third quarter and good execution during the fourth quarter. Cerus, a blood safety company, is picking up a lot of market share in the U.S. which the Portfolio Manager thinks bodes well for revenue trends in 2016.
On the other side of the ledger, Merit Medical Systems was one of the laggards. The Portfolio Manager thinks investor expectations were unrealistically high going into the quarter and their shift of manufacturing to a brand new facility resulted in lower revenue growth and margin expansion.
Portfolio Manager Cam Philpott’s comments were made in a January 15, 2015 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

Market Cross Currents
Heading into year end, we see a number of cross currents. On the one hand, we got some supportive domestic macroeconomic data, and more importantly, the companies themselves had a chance to talk about what their businesses were doing. On the other hand, investors’ fears grew again on China, and they worry that the commodity markets are a sign that demand globally is a problem. There were also increased concerns in the currency market.
Interest Rate Rise Impact on the Portfolio
For the first time in a while, the Fed raised 25 basis points in mid-December. Following that move, there was debate over what it actually meant. We believe that the coalescing opinion following the meeting was that the Fed waited too long to act, and is raising interest rates into a softening global economy. You have the traditional negativity following any Fed decision. We believe what the Fed did was to confirm the prevailing sentiment that was sour. The bulk of the portfolio gains were achieved in the first two months and the fade into year end did not wipe out those gains.
Focusing on Domestic Businesses
At the end of the day, we are focused on domestic businesses. Broadly, what is going on in China doesn’t have a lot to do with domestic companies’ growth potential. Our strength is looking at businesses and deciding if they have the competitive advantages to sustain growth. In a period like this, small cap stocks as an asset class typically are viewed as higher risk, and the markets get concerned globally. However, smaller caps fundamentally have the least ties to what the market is concerned about. We think that fundamental data will go a long way towards calming people down.

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.