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Small Cap Growth Opportunities Fund —
Small cap growth stocks post modest advance in Q2
2nd Quarter, 2015
"Much of the quarter was defined by volatility and investor indecision. "
– Elk Creek Partners, LLC

Shares of smaller U.S.-based companies generated positive results for the second quarter of 2015. The Russell 2000® Growth Index, a measure of growth-oriented companies in the small cap segment of the market, returned 1.98% for the three months ended June 30, 2015, outperforming most other U.S. equity markets. The majority of economic sectors in the index gained ground, led by Health Care and Telecommunication Services, while Materials and Consumer Staples lagged on a relative basis.
The Harbor Small Cap Growth Opportunities Fund returned 1.51%, trailing the index by 0.47%. Stock selection and sector positioning hurt Fund performance relative to the index. The combined impact of an underweight to Health Care and security selection within that sector was by far the largest contributor to relative underperformance during the quarter. Stock picking in Consumer Discretionary and a larger than index exposure to Industrials, one of the worst performing sectors in the quarter, also weighed on relative returns. These negative factors were partially offset by positive security selection in the Information Technology sector.
Performance struggles in Health Care were broad-based and driven by stock picking in a variety of industries, including security selection in pharmaceuticals, where holding names like Pernix Therapeutics and IGI Laboratories detracted from results. A large underweight to the highly volatile biotechnology industry also hurt relative performance as this area of the market delivered double digit returns for the quarter. Within Information Technology, good stock picking in the internet software & services industry and the semiconductors industry partially offset negative relative returns as overweights to companies such as Dealertrack Technologies, Xoom, and MaxLinear delivered strong results.
Cam Philpott's comments were made in a July 13, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2015.

Interview Highlights

Volatile Markets
Much of the quarter was defined by volatility and investor indecision. April was broadly weak for equity markets, May was very strong, and June started strong but ended weak. Over this period, markets were driven by a combination of fundamental factors (such as corporate news) and the macroeconomic environment (such as developments in Greece and general international tension). Overall, there exists an underlying anxiousness with investors: it is almost as if the echoes of the Global Financial Crisis are still lingering, and investors are growing increasingly cautious and uncertain about the direction of the economy and markets.
Solid Year-to-Date Results
Despite investor unease and anxiety, year-to-date results have been very good, with the small cap growth universe up 8.74%. We believe that the underlying fundamentals of companies are better than investor behavior suggests. Mixed sentiment has been driven by varied headline news, although measures such as improving payroll and construction suggest that, on balance, the economy continues to improve, albeit in a lumpy path.
Focus on Long-Term Business Fundamentals
It is important to remind investors that our main focus is on the fundamentals of businesses that the firm analyzes. The team is not using any top-down view as a backdrop to select stocks. Instead, we are describing the macroeconomic setting to help investors frame and understand the environment that they are broadly dealing with. We continue to think about companies one business at a time. For example, does a product or service have defensible attributes? Does the firm have a pathway to sustained growth? Does the business take share within its market? Does the stock have a valuation that we find attractive? Performing this type of fundamental work is how we construct a portfolio – one investment at a time.
We continue to find good investment opportunities. Our portfolio holdings generally continue to report good numbers, and when the market shifts from focusing on the macro to company fundamentals, we believe the portfolio will be rewarded. We believe that stocks ultimately reflect their underlying fundamentals. Our approach is to focus on business fundamentals, which we believe will be rewarded 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.