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Small Cap Growth Opportunities Fund —
Small cap shares edged higher in Q2, led by Energy and Utilities shares
2nd Quarter, 2014
"We are optimistic about what we're seeing at this point. We feel good about how the businesses in the portfolio are performing. "
– Elk Creek Partners, LLC

Shares of smaller U.S. companies moved higher in the second quarter of 2014, albeit at a slower pace than that of their large cap counterparts. Small cap growth stocks posted a return of 1.72%, as measured by the Russell 2000® Growth Index. By comparison, the Russell 1000® Growth Index, a measure of large cap growth stocks, returned 5.13%. Energy and Utilities were the best performing areas of the small cap growth index, while Telecommunication Services was the only sector to lose ground.
The Harbor Small Cap Growth Opportunities Fund returned 1.31%, trailing its Russell 2000® Growth benchmark in the second quarter. The Fund began operations February 1, 2014. In the five-month period from its inception through June 30, 2014, the Fund recorded a return of 8.40%, outpacing the 4.01% return of the Russell 2000® Growth benchmark.
Portfolio Manager Cam Philpott notes that despite the relatively modest quarter-to-quarter change in the small cap growth index, the second quarter actually saw considerable volatility, with a sharp decline at the beginning of the period and a strong rebound at the end. In view of strong overall equity market returns over the past 18 months, Philpott expects little, if any, additional expansion of price/earnings multiples and therefore believes that earnings growth will be the key determinant of stock market performance going forward.
Leading individual contributors to Fund returns in the second quarter included Energy holdings Goodrich Petroleum and Bonanza Creek Energy, InterMune in the Health Care sector, and Marcus & Millichap in the Industrials sector. Health Care names Auxilium Pharmaceuticals and Cynosure were the biggest detractors, along with Finisar and Infoblox in the Information Technology sector. InterMune and Infoblox were liquidated from the portfolio.
Cam Philpott's comments were made in a July 15, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2014.

Interview Highlights

Normal positioning
Overall I think the portfolio is pretty normal right now. We don't feel that we've drifted towards businesses that you would consider to be more defensive or businesses that you would consider to be more cyclical or offensive. I think we've got a pretty representative stable of growth companies.
Stock-by-stock focus
Since the financial crisis of 2008, some portfolio managers seem to have gone away from their historic strengths and adopted a macro perspective to position their portfolios. The result of this is a decrease in the kind of bottom-up, stock-by-stock analysis that people used to do. We hear anecdotes about that and we have seen indications of it in the market. One of the things we talk about as portfolio managers is staying focused on what our long-term skill set has been - doing the fundamental analysis to understand if a particular company represents an attractive business with a sustainable growth profile and a valuation that makes sense to us.
Earnings a key driver
Our general expectation is that P/E multiples have expanded about as far as they are likely to go at this point. You might have sectors that gain a little in favor here or there. But I think in aggregate, earnings will have to be the bulk of the driver for further gains in the stock market.
Positive outlook
We are optimistic about what we're seeing at this point. We feel good about how the businesses in the portfolio are performing. We will see a series of report cards over the next three to four weeks as we go through earnings season, but based on where we stand right now, we feel good about the state of the portfolio and how we're positioned.
Long-term perspective
Finisar is a key supplier within the optical telecommunication industry. Although it reported marginally better revenues than we expected, margins were not where we thought they would be. This created what we think is a temporary dislocation in the stock price, as investors in the Information Technology sector tend to be particularly volatile around margin levels. Our view is that we may be seeing a temporary drop in margins but we don't think we're wrong on our assessment of the long-term demand trajectories for this business.

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.