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Small Cap Growth Opportunities Fund —
Investors generally maintained their good moods that began in late 2016
1st Quarter, 2017
"While we are more optimistic about underlying business fundamentals, our concern is that further delays to unveil a specific economic plan out of Washington could significantly test the positive mood of the markets. "
– Elk Creek Partners, LLC

Investors generally maintained their good moods that began in late 2016, and equity returns were broadly positive for the first quarter of 2017. Underlying optimism seemed more based on what could happen politically to spur growth rather than specific proposals or legislative acts. In this environment, small cap growth stocks, as measured by the Fund’s benchmark, the Russell 2000® Growth Index, posted a return of 5.35% for the quarter. Within the Russell index, the Health Care sector was the strongest performer. The Materials and Information Technology sectors also had strong returns. The Energy sector declined significantly for the quarter, while the Telecommunication Services sector fell modestly.
The Harbor Small Cap Growth Opportunities Fund outperformed its benchmark, with a quarterly return of 8.07%. Stock selection in the Health Care and Consumer Discretionary sectors contributed to relative performance for the quarter. Security selection in the Information Technology sector detracted from relative results.
Elk Creek Partners’ comments were made in an April, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended March 31, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2017.

Interview Highlights


Macroeconomic Data Were Generally Constructive
Macroeconomic data was generally constructive, yet far from conclusively positive. For example, payroll data has been better than expected, though estimates for gross domestic product growth gradually fell during the quarter. Corporate earnings were well received by investors, and equity markets performed well during reporting season. Most management teams steered away from political or policy forecasts and remained focused on their own businesses. For now, both investors and company managements are awaiting specifics. Before the quarter ended, investors’ positive sentiment was challenged by the failure to pass health care reform, and the broader market lost a little luster during the final month of the quarter. Investors’ outlooks were not specifically tied to Health Care, in our view; however, the legislative setback created doubts about other initiatives, like tax reform, upon which investors do place significant importance.
Higher Interest Rates Do Not Appear to be a Broad Concern for Investors
The Federal Reserve (Fed) raised rates in March, which could have contributed to some diminished investor enthusiasm, although the increase seemed well telegraphed and should not have surprised many people. Fed watchers believe short-term interest rates are likely to continue to rise at a modest, measured pace, and most strategists seemed to argue that a return to a more normal monetary stance by the Fed would likely be a positive development for the markets. At this point, higher interest rates do not appear to be a broad concern for investors.
We Believe Stock Prices Should Ultimately Track Company Fundamentals
We remain committed to our long standing investment process that focuses on identifying individual companies with attractive fundamentals. As recently as the fourth quarter of 2016, many of our Health Care sector holdings underperformed as investors looked to other sectors, partially based on a broader market narrative about what changes might occur in the aftermath of the election. During the first quarter of 2017, many of those same Health Care companies reported strong results and helped the Fund’s performance. We are willing to be patient and disciplined if company fundamentals remain intact, and we point to these past two quarters for the Health Care sector as an example of how investors can lose sight of underlying businesses when they pursue the market’s broader narrative. Over time, we believe that stock prices should ultimately track company fundamentals and that staying focused on getting the businesses right is integral to long-term performance.
We Are More Optimistic Given the Underlying Business Fundamentals
We believe investors remain constructive about the overall economic outlook; however, given the legislative setback for the Republicans on health care, we also believe that doubts have crept into the market regarding what Congress might pass. From our observations and discussions with other investors, tax reform seems to be the most important issue, and while trial balloons have been floated, a tax proposal had not been announced by quarter end. Our concern is that further delays to unveil a specific plan, beyond the next couple of months or so, could significantly test the optimism that has gripped investors since the days following the election. While we are more optimistic about underlying business fundamentals, our concern is that further delays to unveil a specific economic plan out of Washington could significantly test the positive mood of the markets.

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 www.harborfunds.com.

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.