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Small Cap Growth Opportunities Fund —
Small cap U.S. stocks post positive results
4th Quarter, 2016
"Positive sentiment entering the quarter turned negative leading up to the general election, only to turn positive again post-election. "
– Elk Creek Partners, LLC

The most significant macroeconomic event that occurred during the fourth quarter of 2016 was the presidential election in the United States on November 8. Investors’ moods shifted several times during the fourth quarter. Positive sentiment entering the quarter turned negative leading up to the general election, only to turn positive again post-election. In this environment, small cap growth stocks, as measured by the Fund’s benchmark, the Russell 2000® Growth Index, posted a return of 3.57% for the quarter. Within the Russell index, the Financials sector was the strongest performer. The Telecommunication Services and Industrials sectors also had strong returns. The Health Care sector declined for the quarter, while the Information Technology and Real Estate sectors had positive results but lagged the benchmark’s return.
The Harbor Small Cap Growth Opportunities Fund underperformed its benchmark, with a quarterly return of 0.00%. Stock selection in the Health Care sector detracted significantly from relative performance for the quarter. The Industrials sector contributed to relative results, largely due to an overweight position.
Elk Creek Partners’ comments were made in a January, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended December 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through December 31, 2016.

Interview Highlights

U.S. Stocks Staged Dramatic Rally Following the Election
Broadly speaking, up until the U.S. election, investors seemed primarily concerned about economic growth prospects and a possible recession in 2017. Despite lingering angst, corporate earnings reports were fairly consistent with expectations, yet they failed to improve investor sentiment. The environment changed on the night of the U.S. presidential election, which drove a total sentiment shift that happened incredibly fast. Many market pundits predicted a negative reaction should Donald Trump win the election, and some went so far as to predict a market crash. Initially, the less hyperbolic calls were somewhat accurate, and equity futures dropped sharply overnight as Mr. Trump’s electoral vote tally surpassed the needed 270. The next trading day, however, the markets reversed course rapidly, never trading at levels predicted by overnight futures, and they managed to stage a dramatic rally that essentially lasted to the end of the year.
Our Sector Positioning was Largely Unchanged During the Quarter
The portfolio’s sector overweights and underweights relative to its benchmark were largely unchanged during the period. During the fourth quarter, we were overweight the Information Technology, Consumer Discretionary and Health Care sectors and had significant underweight positions in the Real Estate, Materials and Consumer Staples sectors. Historically, a majority of the portfolio has been invested in the four growth sectors: Information Technology, Health Care, Industrials and Consumer Discretionary.
Investors Expect Pro-Growth Initiatives
Investors are expecting pro-growth initiatives out of Washington, D.C., and they seem to believe that the mood of the electorate tilts the probabilities toward more bi-partisan cooperation in whatever finally emerges from the legislative process. Naturally, investors should expect some bumps along the way; however, we believe the first wave of initiatives is likely to be aimed at spurring domestic economic growth, which has been the underpinning of the recent stock market rally and could benefit domestically based companies. We have not changed our outlook or our longstanding process, which aims to identify companies that we believe have superior, sustainable growth prospects and that typically outperform other companies within their end markets over the long-term.

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.