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Small Cap Growth Opportunities Fund —
Stocks rise despite market uncertainty
3rd Quarter, 2016
"Historically, our success has been driven by staying focused on finding individual companies that can grow revenue and earnings sustainably, at above-average rates. "
– Elk Creek Partners, LLC

The second quarter ended with investors trying to figure out what to make of the volatile markets in the aftermath of the Brexit vote. During the third quarter of 2016, investors were anxious about corporate earnings and believed company managements would use Brexit-related concerns to issue weak or poor guidance for the second half of the year. Few of these fears materialized. In such an uncertain environment, small cap growth stocks, as measured by the Fund’s benchmark, the Russell 2000® Growth Index, posted a return of 9.22% for the quarter. Within the Russell index, the Energy sector was the strongest performer, although it represented a small portion of the index. The Information Technology and Health Care sectors also had strong returns. The Telecommunication Services and Utilities sectors, small weightings in the index, declined.
The Harbor Small Cap Growth Opportunities Fund outperformed its benchmark, with a quarterly return of 12.44%. Stock selection in the Health Care sector made it the largest contributor to relative performance for the quarter. The Industrials sector detracted from relative return, largely due to stock selection.
Elk Creek Partners’ comments were made in an October, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2016.

Interview Highlights

Equity Markets Rebounded Following Brexit-Related Volatility
We ended the second quarter with a discussion of “risk-on” and “risk-off,” partly to describe prevailing market sentiment due to market volatility following the Brexit vote, and partly to describe an ongoing, longer standing mentality. In early July, market pundits worried about Italian banks, and in late September, they fretted about Deutsche Bank. As we have said many times previously, the scars of 2008 are still with investors, and the strong upward move in equity markets since that time has not made them go away. Since the Lehman Brothers bankruptcy in September 2008, the financial media has consistently focused on what could disrupt global macroeconomic growth, contributing to the ongoing negative sentiment. In such an environment, equity markets performed far better during the third quarter than most observers predicted.
Global Monetary Policy Remained Accommodative
Market pundits spent a lot of time discussing global monetary policy and potential central bank actions. As time passed during the quarter, the growing consensus among monetary policy wonks seemed to be that central banks would likely stay accommodative for longer than previously expected. Many strategists felt that equities benefitted from this concept since central banks would not inhibit global economic growth by raising short-term interest rates. Domestically, the Federal Reserve did not take action at its July or September meetings, and expectations are for a relatively slow series of increases once it does raise interest rates again, possibly in December.
Staying True to Our Investment Process
From our perspective, this past quarter is precisely why we talk about staying disciplined in our investment process. By staying focused on purchasing good companies with what we believe to be sustainable growth prospects, the Fund produced strong absolute and relative returns during a period when initial expectations were widely negative. Generally speaking, any investor who went to cash over Brexit fears missed a significant upward move in the equity markets. We think the third quarter highlights the risks of attempting to time the market, as well as the potential virtues of a consistent process.
Earnings Will Need to Drive Equity Markets
We believe there is much more behind this past quarter’s strong equity market performance than just multiple expansions from new expectations regarding global monetary policy. We saw some fairly strong earnings reports from companies represented in the portfolio, and the breadth of attractive stocks, across different industry groups, was notable and encouraging to us. Going forward, expectations are more elevated given that broader equity valuations are higher than at the end of the second quarter. Thus, we believe earnings will probably be the necessary driver of equity returns rather than further multiple expansion. As always, we will continue to be focused on finding good companies with sustainable growth prospects, and we will stay disciplined to our investment style and process.

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.