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Small Cap Growth Opportunities Fund —
Stocks advanced in the second quarter amid improved corporate earnings
2nd Quarter, 2017
"We believe earnings and earnings growth will have to be the predominant force to drive further price appreciation. "
– Elk Creek Partners, LLC

Domestic equity markets posted positive returns for the second quarter of 2017, despite volatility. The period began with corporate earnings results that generally exceeded investor expectations. Many industrial companies reported growth rates not seen in several years, with demand improvement not only from inventory replenishing, but also from improving customer activity. In this environment, small cap growth stocks, as measured by the Fund’s benchmark, the Russell 2000® Growth Index, posted a return of 4.39% for the quarter. Within the benchmark, the Telecommunication Services sector was the strongest performer. The Health Care and Real Estate sectors also had strong returns. The Energy sector declined significantly for the quarter, while the Consumer Staples and Financials sectors fell slightly.
The Harbor Small Cap Growth Opportunities Fund performed in line with its benchmark, posting a return of 4.53%. Stock selection in the Consumer Discretionary and Industrials sectors contributed to relative performance for the quarter. Security selection in the Health Care sector detracted from relative results.
Elk Creek Partners’ comments were made in a July, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2017.

Interview Highlights

Policy Initiatives Continued to Prove Evasive
During the quarter, policy initiatives continued to prove evasive, as investors awaited news of progress out of Washington. Announcements on taxes and infrastructure had yet to come from the administration, and Congress continued to struggle with health care legislation. Some political pundits believe the dramatic changes at the Federal Bureau of Investigation potentially jeopardize the administration’s legislative agenda or, at a minimum, delay progress until the investigations conclude.
The Federal Reserve Raised Short-Term Interest Rates
The Federal Reserve (Fed) raised short-term interest rates for the second time thus far this year, and most Fed watchers believe at least one more rate hike is coming before year end. The Fed continued to talk about a gradual recovery of its balance sheet and a normalization of yields. Investors seemed sanguine about monetary policy being a headwind to economic trends or equity valuations. While many economic variables exist on the fiscal side of the equation, some economists have been buoyed by the lack of inflationary pressures in the U.S. economy, particularly weak crude oil prices in June.
We Remain Committed to Our Long-Standing Investment Process
We do not select investments based on themes like potential political change; rather, 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 holdings in the Health Care sector underperformed as investors looked to other sectors, partially based on a broader market narrative about what changes might occur following the U.S. presidential election. During the first half of 2017, many of those same companies reported strong results and were positive for the portfolio. We are willing to be patient and disciplined if company fundamentals remain intact, and we point to the past three 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 outperformance.
We Believe Earnings and Earnings Growth Need to Drive Price Appreciation
Equities performed well for the first half of 2017, particularly considering how far stocks rallied in late 2016. Investors have been both positively surprised and disappointed by developments versus broad expectations at the start of 2017. Relative to the beginning of the year, we believe most investors had expected more tangible policy objectives and progress out of Washington to stimulate economic growth. At this point, investors remain patient, yet how long that patience lasts is uncertain and an important question for the market. On the positive side, corporate earnings have been a little better than expected, especially from Industrials companies. Equity valuations have expanded from policy expectations that have yet to be met and strong earnings, in most sectors, that have been meeting or beating broad expectations. At current levels, we do not expect equities will get much further help from expanding multiples. Thus, we believe earnings and earnings growth will have to be the predominant force to drive further price appreciation.

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.