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Small Cap Growth Opportunities Fund —
Stocks fall following U.K. vote to leave European Union
2nd Quarter, 2016
"Over time, we believe that shareholder returns are driven by good business fundamentals, and our investment process is focused on judging the sustainability of individual companies' growth prospects. "
– Elk Creek Partners, LLC

Small cap growth stocks gained in the second quarter of 2016, despite significant volatility near the end of the period following the U.K.’s decision to leave the European Union. Small cap growth stocks, as measured by the Fund’s benchmark, the Russell 2000® Growth Index, posted a return of 3.24% for the quarter. Within the Russell index, the Telecommunication Services and Utilities sectors were the strongest performers, although they represented small portions of the index. The Energy and Consumer Staples sectors also had strong returns. Consumer Discretionary was the only sector to decline for the quarter.
The Harbor Small Cap Growth Opportunities Fund underperformed its benchmark, with a quarterly return of 2.51%. Stock selection in the Consumer Discretionary 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.
Top detractors from the Fund’s relative return included MDC Partners, Pacira Pharmaceuticals, Korn/Ferry International, Gogo and Papa Murphy’s Holdings. In contrast, Endologix, Teladoc, Evolent Health, Ruckus Wireless and Teligent contributed to relative performance for the quarter. Strong operating results and merger and acquisition activity drove investor interest in the companies that performed well.
Elk Creek Partners’ comments were made in a July, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2016.

Interview Highlights

Transportation Company Added
We use a bottom-up, fundamental approach when identifying new names for the portfolio, rather than a thematic or trends approach. During the quarter, we added Echo Global Logistics, a transportation brokerage company, to the portfolio. The company has a legacy expertise in the less-than-truckload market, and its recent acquisition of a privately held company expands its reach into truckload. Transportation stocks have been selling off over economic concerns, and investors in truckload stocks have been concerned about falling spot rates in that market. Echo has been taking market share, and we believe the broader concerns about macroeconomic growth are more relevant for large, established companies that have less opportunity to take market share. In addition, we believe that Echo’s technology investments have created competitive advantages over smaller players. We think the company has done a good job of expanding margins, and we are optimistic about the company’s ability to grow earnings.
Wireless Infrastructure Company Liquidated
We sold Ruckus Wireless during the quarter as the company agreed to be acquired by Brocade Communications, a mid cap network solutions company. The price was a combination of cash and stock; however, Brocade’s market cap size precluded the portfolio from maintaining the position.
Fundamentals Are Our Focus
In the recent global, macro-event-driven environment, small cap stocks have often performed worse than large caps. What is interesting to us about this phenomenon is that small cap businesses are, broadly, more removed from international fundamental factors than large cap businesses, which tend to be more global in nature. The word “fundamental” is important, because business fundamentals are our focus. We hear members of the financial media discuss the trading environment using terms like “risk on” or “risk off.” While we clearly understand the implications of those terms, we do not manage portfolios by putting “risk on” or taking “risk off.” Our goal is to understand the individual businesses that we invest in. Over time, we believe that shareholder returns are driven by good business fundamentals, and our investment process is focused on judging the sustainability of individual companies’ growth prospects. We have seen periods recently, such as during earnings reports, when those business fundamentals have been the driving influence of stock price movements. Our frustration during the recent Brexit-related sell-off was with how indiscriminate the selling was. Nevertheless, our conviction in our investment style and process is unwavering, and regardless of near-term macro-related concerns driven by a “risk off” mentality, we continue to believe that stock prices will ultimately track the business fundamentals of the companies themselves.

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.