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Small Cap Growth Opportunities Fund —
Opportunities arise for fundamentals-based approaches in the quarter
3rd Quarter, 2015
"Over time, you have to get the businesses right. If you don't get the businesses right, then the stocks won't perform. "
– Elk Creek Partners, LLC

After a relatively solid start, small cap growth stocks ended the third quarter of 2015 sharply lower due to fears of a global economic slowdown, fears which were not reassured by the Federal Reserve’s decision to maintain short-term rates at previous levels. The Russell 2000® Growth Index, a measure of growth-oriented companies in the small cap segment of the market, declined by -13.06% for the three months ended September 30, 2015. All economic sectors in the index gave up ground during the period, with the Energy, Health Care, Materials, and Utilities groups falling the most.
The Harbor Small Cap Growth Opportunities Fund lost -13.85% for the quarter, trailing its benchmark by -0.79%. Stock selection hurt performance relative to the index. Selections within the Consumer Discretionary sector were the most damaging. The shares of retailer Tuesday Morning struggled during the quarter as investors have been disappointed with its sales growth. Likewise, digital coupon company RetailMeNot has had disappointing revenue performance because it has struggled to monetize mobile device users. On the positive side of the ledger, stock selection was strong in Health Care. Depomed, which focuses on pain therapies, has had good operating performance. The company also received an unsolicited takeover bid during the quarter, which sent its shares higher.
Sector allocations were additive to relative results. The Fund had underweight positions in each of the four hard-hit sectors mentioned in the first paragraph above. Its underweight position in Health Care was the most helpful. In particular, the Manager has been leery of unproven business models within the biotechnology industry, and this stance paid off during the quarter as investors also became cautious of these companies.
Portfolio Manager Cam Philpott's comments were made during an October 14, 2015 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1, 2015 through September 30, 2015.

Interview Highlights

Broad-Based Sell-Off
Overall, the third quarter was a very weak period for equities. As the quarter ended, we saw what we viewed as fairly indiscriminate selling. As we look at the sectors of the benchmark, everything was down. If you look at which sectors declined the most, you see Industrials, Materials and Energy, but interestingly, Health Care also fell sharply, and Health Care has not been one of the lagging sectors in past contractions.
Continued Caution on Biotechnology
We believe that a meaningful portion of the biotechnology weight in the Russell 2000® Growth Index is made up of pre-commercial companies with valuations that remain extended on a historical basis. We believe that if investors are reassessing risk, this group has further downside, and it won’t be a leadership group, should the market decide to really turn and rally.
Choosy on the Consumer
Given the correction in oil prices, most would have expected broader sales figures for Consumer Discretionary companies to be somewhat better. However, results have been quite mixed. We have been focused on businesses where we believe there is a proprietary product. It can’t be a product that Amazon can deliver less expensively or a product that’s dependent on mall-oriented traffic, because mall-oriented sales continue to be weak.
Finding Opportunities
We embrace things that make businesses different from other businesses. So when there is a basket sell-off, when there is indiscriminate market behavior, we think by sifting through the pieces and using our process and judgment, we are going to make good allocation decisions and incrementally tilt the portfolio towards names that have the potential to deliver higher relative returns. When the markets sell-off as they did last quarter, it’s painful, but we believe the lack of differentiation leads to opportunity.

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.